My Thoughts on Analysts: Doug Casey

I first encountered Doug Casey at the 2004 World Gold, PGM, & Diamond Conference in Vancouver.  Around a year before, I became convinced that we were in the early stages of a Gold bull market, partly based on the arguments of Richard Russell, and partly based on my own conviction that people would come to see the world as an increasingly uncertain place in the years to come (a process which, in my opinion, has much farther to go.)  I was dissatisfied with Russell’s picks (his top pick for a gold mining company was Newmont, based on the fact that it was the largest gold company at the time.  NEM has risen about 20% in the three and a half years since Russell first brought it to my attention, which is an uninspiring performance, considering that gold has risen about 70% over the same period.  As I’ve said before, Russell isn’t much of a stock picker… he just has an incredible feel for market and sector moves.) 

I also have some serious reservations about Gold mining, because of its serious environmental impacts.  This was before it was possible to buy precious metals in the form of ETFs such as IAU, GLD, or SLV, and so I was looking for an analyst who understood mining companies, and might also be able to point me towards companies that mine precious metals relatively responsibly.  No one at the conference was talking about environmental responsibility, but two of the analysts whose talks I attended stood out as having an understanding of how mining companies and the precious metals industry work.  Those two were Paul van Eeden and Doug Casey.  

Casey in particular caught my attention because he was a big proponent of a type of company he refers to as “Land Banks:” these are companies which do not have any actual mining operations, but rather buy up mineral rights that have already proven.  They hold these mineral rights, doing only exploratory drilling to further prove out their reserves as a speculation on rising prices.  While the intent is always that they will eventually sell the mineral rights to other mining companies, since they are not engaging in current mining operations, they are less harmful to the environment than companies that actually dig the stuff out of the ground.  Silver Standard, SSRI was the company that invented this model buy buying up cheap rights to silver deposits when the metal was cheap in the late 1980s and 1990s, while Vista Gold, VGZ is following in SSRI’s footsteps by investing in gold deposits.  Robert Quartermain, the president of Silver Standard serves on Vista’s board.  (Note: I and some of my clients hold substantial positions in both stocks.)

Casey is not interested in the land banks because his is an environmentalist (quite the opposite, see below), but because he recognizes that, if you believe that gold (and silver) are “Going to the moon” as he says, then the built in leverage of owning metal in the ground can make more sense than digging the metal up and selling it while the price is still rising.

After the conference, I bought a 2 year subscription to Casey’sInternational Speculator newsletter (for $299… I note that the price has since risen along with gold.)   Here are a few of my conclusions:

  • He knows the world of junior mining companies backwards and forwards.   Small start up companies are always the most fertile ground for a company analyst, because less is known about them, and because few investors are paying attention, it is much easier to find information or come to conclusions about a company that are not widely recognized by the investing public.  His picks among the large and medium cap companies don’t seem any better than anyone else’s, but his picks among the small and medium cap miners have been excellent.
  • His 7 P’s framework for evaluating resource stocks is an excellent framework for organizing the relevant information about a company.  I have adopted a modified version which I use to evaluate renewable energy and energy efficiency companies.
  • He takes libertarianism to an extreme.  “Wacko” is a word that comes to mind.  But being crazy and being intelligent are not mutually exclusive; in fact, they often seem to go hand in hand.  In my opinion, that’s the case with Casey. 
  • Enough people follow his newsletter that it often was not a good idea to buy a stock right after he recommended it.  I had my best results by waiting a while and buying them a month or two later, if they had not just kept on rising.  For big spenders who want to seriously speculate in resource stocks, the Casey Investment Alert would likely be worth the money, given that they had a few hundred thousand dollars with which to speculate.  For myself, I’m very tight with my money, and I was more interested in understanding his methods than following his advice.  Of the stocks I did buy on pullbacks after he had recommended them, about half have more than doubled, another third are roughly flat, and the rest are down… which works out to be excellent average returns.
  • The only stock of his (other than Vista and Silver Standard) that I made a large investment in was Nevada Geothermal (which I still own… I even bought some more recently, and have recommended it to clients.)  It’s only up slightly since I first bought it, but since it is a renewable energy company, I’m happy to hold it for the long haul.  I’ve also heard some good things about it from other sources.

I did not renew my Speculator subscription when it lapsed last summer, mainly because I feel that while the precious metals bull market is likely to continue, the risks are much greater than they were when I first started allocating money to the sector.  I am currently slowly reducing my exposure to precious metals, although I still recommend small investments in precious metals (via the GLD, SLV, VGZ, and SSRI) to my less conservative clients.  I also like Rio Tinto for a general exposure to metals, because, in my opinion, RTP the most environmentally responsible miner out there.   I note that the main page of their website says “Rio Tinto supports the main conclusions of the UK’s Stern Review on the economics of climate change.”  (Again, some clients and I have positions in RTP.)

Back to Casey, after my International Speculator subscription lapsed, I signed up for his free newsletter What We Now Know (WWNK).  Naturally, there aren’t stock tips in WWNK, but I wanted to keep an eye on what Casey thought about the markets and world events in general.  WWNK is a lot more of a political tract than the Speculator (although he often had some rather scathing things to say about the US government, and I could not help but be amused at the way he refers to US citizens as Boobus Americanus.) 

Casey does not write much of WWNK, but I’m confident that the people who do are on the same wavelength.  The underlying message is that any sort of regulation is evil, an attitude which is unsurprising in an investor in mining companies.  As Jared Diamond outlines in his excellent book Collapse, gold mining companies usually leave environmental problems behind them that are much more costly to clean up than all the profits they ever make from selling their product.  Since Casey primarily analyzes and invests in mining companies, it’s no real surprise that he’s hostile to regulation, since real regulation would bankrupt most of his babies.

Unlike my previous entries in this series, I was prompted to write this entry in response to an article in WWNKDoug Hornig wrote a diatribe in an attempt to contradict the arguments for global warming.  It’s the usual stuff… “temperatures have not gone up that much”  “there have been previous periods of warming” “evidence for past temperatures is all indirect”… all attempts to muddy the waters, and no mention at all of the massive increase in the main driver of global warming: atmospheric CO2.  I’m not going to bother to deal with all his points… it’s not really a serious fact-based argument, rather a litany of the reasons (some real, some imagined) why there is some doubt about the reality or consequences of global warming, and, as such, just an exercise in obfuscation. 

It’s unfortunate, but people who want to believe that global warming isn’t happening gravitate towards arguments like these.  It’s not really a logical argument, but rather just people seeking to justify belief in what they want to believe.  I think it’s better perhaps to just make a meta-argument: if global warming is just a figment of liberal’s imaginations, why aren’t there a lot of wackos out there trying to muddy the waters by casting doubt on “the scientific theory of global temperature stability or cooling.”   No one is trying to cast doubt on the theory of “global temperature stability” because there is no such theory… and no evidence that our climate is stable.  It’s getting hotter, and it’s likely to get a lot hotter unless we get serious and do something (actually a lot of somethings) about it. 

In conclusion, Doug is a great analyst of resource companies, and if you’re interested in investing in those companies, you will do well by giving him a read.  But he also has a political agenda, and his belief that government is always bad is, simply put, wrong.  I wish he and his buddies would stick to their knitting.

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6 Comments

  1. i subscribe to WWNK and had similar thoughts when i scanned that article … i didn’t bother reading it closely because i firmly believe CO2 is driving global warming.

    i have also come to believe that there is not anything that can be done at this point to stop the earth from becoming hotter. the permafrost has begun to melt in siberia – that alone will release millions of tons of CH4 into the atmosphere, so even if CO2 emissions were reduced tomorrow, the CH4 will more than readily pick up the slack.

    anyway, good post. i enjoyed it
    -tom

  2. tomkonrad said

    Thanks for the comment, Tom.

    At this point, it’s probably time we stop talking about “believing” global warming… I think that’s just playing into the hands of the people trying to muddy the waters. The only serious debate is: how much? and how fast?

    I agree, global warming is no longer preventable… it’s already happening. All we can hope to to do is mitigate the effects… and they’re likely to need a lot of mitigation.

    Escaping methane from tundra is just one of many positive feedback loops we’re going to have to deal with… Most likely, reducing our emissions is only a first step. Although the world is not yet ready for it, when these positive feedback loops start kicking in, we’re probably going to need to stop talking about carbon neutrality and start talking about going carbon negative.

    Why don’t I say these things in a general post? Because, as I said above, I don’t think the world is ready… we won’t be until there is a real disaster, such as the loss of the Greenland ice cap. As long as highly intelligent people like Doug Casey are denying Global Warming, the world won’t be ready to do what it takes to go carbon negative. Heck, we’re not even ready for carbon neutrality yet… we’re just talking about carbon reduction.

    How do we go carbon negative?
    1. Terra Preta
    2. IGCC with sequestration and biomass instead of coal as the feedstock.
    3. Create algae blooms in the oceans by feeding them micro-nutrients and letting them sink to the bottom.
    4. More strategies I have not thought of… but it can be done, we just need the will.

  3. dan cap said

    There is a new video out of Doug Casey’s speech, given at the Rim of Fire Conference in Vancouver (07/07)…

  4. […] simply hyping their products.  Instead, I hit on the idea of writing a review, much like I reviewed the International Speculator in 2007 (for no compensation at the […]

  5. […] For readers who found my comments about other stock analysts useful (Especially the one about Doug Casey) I’ve just published a review of Casey Research’s market newsletter Casey Energy […]

  6. Thanks for sharing! Seems like there are some new ideas that everyone can learn.

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