A Conversation with Whitney George, Chief Investment Officer at Sprott and Chairman of Sprott U.S. Holdings

In a recent interview with Whitney George, Chief Investment Officer at Sprott and Chairman of Sprott U.S. Holdings, we covered a number of different subjects including his background, gold’s role in a portfolio, the importance of remaining open minded, Sprott Focus Trust (FUND: Nasdaq) and, finally, the upcoming Sprott Natural Resource Symposium in July.

George is a generalist investor who seeks out quality companies that are selling at a discount to their underlying value. He has been very successful throughout his 30+ years in the investment business.  There are many valuable insights to be gleaned from his responses in this interview.

Enjoy!

 

Brian: What brought you to where you are today, or more specifically, how has your career led you to Sprott?

Whitney: Early on in my career, I figured out that I should listen to my mother who recommended that I pay attention to what Warren Buffett was doing. I started off as a retail stockbroker in resource stocks in the very early ’80s, after their big run in the ’70s. In 1991, I joined my best customer, an investment manager named Chuck Royce, who was somewhat legendary in investing in small- and micro-cap stocks, using a value discipline, which was very nicely aligned with what I was doing. I had a wonderful 23.5-year career at Royce & Associates, managing portfolios and mentoring portfolio managers and building what was, at that time, the premier thought leader in the investment management of small-cap value.

Starting around 2013-14, our discipline at Royce was not working as effectively. The QE programs, or zero interest rate programs, resulted in suspending capitalism for about five years because the discount mechanism behind markets started to malfunction as an unintended consequence of the Federal Reserve’s money printing. Our jobs became very difficult. I found myself making excuses for not keeping up with benchmarks in the mutual funds that I managed, to the point that I thought I could be having more fun going back to building businesses and investing in businesses.

I had a tremendous experience that I reflected on in the late ’90s when everybody wanted large-cap stocks, growth stocks and, ultimately, dot-com stocks. While at Royce, I took a contrarian approach and hired many small-cap value managers that were being dismissed because of the lack of interest in that segment of the market. Of course, when things turned around in 2000-2001 we had all the talent, were very well positioned, and benefited mightily in the next 11 or 12 years from a resurgence in small-cap value investing.

When I began looking around for other opportunities, I was familiar with Sprott. In 2014, Sprott was in the midst of a bear market in precious metals. I knew Eric Sprott quite well. Peter Grosskopf, the CEO, and I got to know Rick Rule very well. Sprott appeared to provide an exciting opportunity for me to repeat what I had done in the late ’90s at Royce, i.e., to lean against the tide, stayed committed to a sector that was very much out of favor, maintain and build a team and product offerings so that when the inevitable recovery in precious metals and mining shares occurs, Sprott could be the leading resource available for investors.

Although when I first joined Sprott in 2015 it was trying to diversify away from precious metals, last year, we decided to part ways with the general mutual fund managers, who are now known as Ninepoint. Sprott is now focused principally on precious metals, mining, and hard assets themes as an alternative investment manager. I think we reasserted our new focus by assuming the management contract of the Central Fund of Canada at the beginning of this year, which we relaunched as Sprott Physical Gold and Silver Trust (NYSE: CEF). We are very committed to our space and our sectors, and we are patiently awaiting the next inevitable recovery.

 

Brian: A qualitative narrative regarding the macro view of the world is constantly being broadcasted by the media. In North America, it was the impending doom related to war with North Korea or, recently, the talk of trade wars due to NAFTA negotiations. 

There are elements of these topics that have quantitative components, but in my opinion, most people concentrate on the qualitative framing that is presented.  I, myself, have struggled with how to properly deal with the qualitative narrative.

Does the qualitative narrative, in a macro sense, affect how you invest in the market? If so, how?

Whitney: I think there is one very long-term theme that became apparent to me back in the 1998-2000 period, which is the debasement of currencies. I am typically optimistic about things. I’m a business value investor. I look for companies that I can buy and theoretically hold forever because they’re well managed, they allocate capital well, and they have strong positions, strong balance sheets.

However, aside from the unprecedented day to day noise created by the current administration, one long-term macro theme that I have every conviction is that when countries get themselves into the kind of financial positions that they’re currently in, there’s only one viable option. Countries do not like to default on their obligations, and certainly austerity measures that try to reign in spending have a very limited and finite life before the population decides they’d like new leadership. I think we are seeing a lot of this around the world right now.

The ultimate solution to resolving too many claims on existing assets is to debase the currency. So printing Dollars, printing Euros, printing Yen has become the norm. I trace the beginnings of this kind of approach back to the Greenspan era, which first started with the Long-Term Capital Management hedge fund crisis and the Russian debt crisis that occurred in the fall of 1998. Certainly, it was repeated after 9/11, and then again after the most recent financial crisis in 2009. I just don’t see any other way out of the current situation other than debasement.

When a currency becomes infinite in quantity, investors should turn their attention to those things that are finite. Precious metals are finite in quantity, as are other hard assets categories like farmland and energy. And, so, an overlying theme to all the investing I’ve been doing for the past 20 years has been an awareness of those investments that will not be debased by what central banks around the world are trying to engineer.

Brian: What utility does gold bring to a portfolio?

Whitney: Gold is a currency that is nobody’s obligation. I view gold as a mandatory allocation in my own portfolio and recommend it to others in its physical form, or some derivative of that.  Gold is the original alternative asset, and it is not correlated to other markets. It provides a bit of insurance in times of high stress. Gold has, in the 18 years since the beginning of this millennium, posted superior returns to U.S. stocks as measured by the S&P 500 Index, including the reinvestment of dividends.

Of course, one can hand pick any time period to make their case. But I find that by having a 10% allocation to precious metals, I’m more comfortable being more aggressive with the other 90% of my portfolio because I have a bit of an insurance policy if things go poorly. Gold gives me another bite at the apple because it provides diversification.

 

Brian: We live in a society of paradigms or bias that lock us into thought patterns that make many of us blind to other alternatives that may be more efficient or beneficial.

Whether it be financial, political or social, in your opinion, how does one keep an open mind and see through paradigms and their own inherent bias?

Whitney: Keeping an open mind to changes is very important. As investors, we all have to learn about new technologies, to try and understand where the opportunities are and where the disruptions will occur. Being diversified and keeping a balanced investment portfolio is critical because we’re not always going to get it right. What happens in society as well as in investing is that after a prolonged period of something being successful, it becomes viewed as somewhat permanent, and people lose sight of the fact that things do change.

I would say that a good example of that now is investing in an S&P 500 Index nine years into a bull market. It has become almost a permanent default, a self-reinforcing phenomenon that is likely to one day not work out. Like any kind of momentum investing, one never knows when the momentum is gone until it is too late. Having a discipline, keeping an open mind, and then sticking to that discipline has worked very well for me, and for many other successful long-term investors. This gives you a strong foundation with which to filter out much of the political and social noise that we’re all being overly bombarded with every day.

 

Brian: While paradigms and bias give us the basis for how we view the world, emotion is the fuel that causes us to act without logic. The biggest lesson I have learned in my speculating career, thus far, is to act against the crowd and buy when everyone else is selling – and vice versa.

How do you control your emotions when speculating in the risky and volatile junior resource sector?

Whitney: My investment hero is Warren Buffett. He has said that as an investor it is wise to be “fearful when others are greedy and greedy when others are fearful.”  Human nature has not changed, and so having tools to deal with one’s own emotions is very important. That gets back to having a discipline and laying out a plan, and then executing on that plan when markets call for it, irrespective of how it feels.

In my case, I spend significant time researching companies and assessing what those companies are worth. What is the fair value of the business? What would another company pay to own all of that business? At what price does that business generate free cash and investor returns to me that are appropriate, and maintain that consistent return/demand throughout the market cycle?

I often think in terms of “cap rates”, which is a real estate term, and which is basically the earnings yield that I get on my investment. What I do is I set out target prices, both buys and sells, where I think a sell price would be a full valuation for a business, and a target price would be that which I would get the kind of return I would like, i.e., the double digits over time, if it should achieve the sell price.

Then, it is a matter of sitting back and waiting, and letting the market do whatever it is going to do on any given day. By having a plan in advance, one can execute on that plan in a fairly unemotional way by buying when the markets are selling off and your companies are approaching your buy targets, and conversely, by liquidating or selling as companies start to approach your sell valuations. For me, it’s a two-step process. First, do the research and understand the business. Second, execute based on what kind of opportunities the market is giving you or taking away.

Brian: Along with being Sprott’s Chief Investment Officer and Chairman of Sprott U.S. Holdings, you are also a Senior Portfolio Manager at Sprott Asset Management USA, where you manage the Sprott Focus Trust (FUND: Nasdaq), which is a closed-end equity investment fund.

Can you give my readers an overview of the Fund’s goal, and the process you employ to achieve that goal?

Whitney: One of my goals when I joined Sprott was to be more closely aligned with the people that I’m working for, i.e., the investors. I brought to Sprott two funds; a hedge fund and the closed-end fund, FUND, that you mentioned, where my extended family and I control about 30% of the shares, which means I am eating my own cooking. For me, the value proposition for FUND is absolute returns. Net of fees, net of taxes, net of inflation. You can’t eat relative performance.

I employ the same discipline I’ve been using since I was co-managing the Fund starting in 1996. I invest in high-quality companies with strong balance sheets, high returns on capital and good management; these are companies that are good at allocating capital. I try to buy them when they are out of favor, and at that attractive cap rate I mentioned earlier, and to hold them until they become fully valued. FUND represents a diversified portfolio of 40-50 stocks. No one stock is allowed to represent more than 5% of the portfolio. FUND is somewhat blind to market cap, although, generally, it has been invested in smaller and mid-cap companies where I have been able to find better valuations.

Since the financial crisis in ’09, FUND has been populated by some mega-cap stocks, including Apple, because its valuation metrics were as appealing as anything I could find by digging down into the micro-cap sector. My approach is a low turnover strategy, buying and holding positions with a 3- to 5-year investment horizon, buying companies when they are out of favor and that I know will survive because of the strength of their balance sheets and their core businesses. I like to hold these companies for as long as it takes the market to recognize its value. FUND is managed for a long-term capital gain objective with a mind to being tax efficient and generating absolute returns. I have maintained an allocation in resource stocks or mining companies in the neighborhood of 10-15%  for many years, somewhat as a hedge. Although I cannot invest in commodities directly, I have found some interesting companies to own in the mining sector. The Fund also owns about 15 percent in energy. My biggest areas of interest right now are in technology, particularly on the hardware side. That is where the market has been concerned about cyclicality recently, and in my mind, misplaced some very high-quality companies.

 

Brian: For me, I get a great deal of value from attending resource investment conferences. In particular, I’m looking forward to attending, what I think is a must attend, the Sprott Natural Resources Symposium in Vancouver next month.

In your opinion, what is the greatest benefit that the Sprott Natural Resources Symposium has to offer investors?

Whitney: I have always found it interesting and important to meet with company management. But being a contrarian, and somewhat of a skeptic, management is always going to tell you the best case story and what it wants you to hear. One of the interesting things that you can learn from conferences is what the peer group of various companies has to say about them, their prospects and their stories, so you get a much more balanced comparison than you might from a one-on-one management presentation.

The views and commentary of other participants at conferences, whether they are investors or competing companies, are often very insightful, if not colorful. Going to a conference and immersing oneself in a sector for four or five days allows you to do some deep thinking without the daily distractions of all that’s going on back at your office.

Brian: Whitney, thank you so much for answering my questions. I appreciate it.

Whitney: You’re welcome.

 

Consistently making money in the market isn’t done without proper due diligence and the personal discipline to see your investment thesis reach its potential.  It’s easy to get caught up in some of the qualitative narrative that surrounds both the market and the world in general. However, as George mentions in the interview, buying quality companies that are selling for less than their value and then holding them as long as you can, until you reach your target price, is an absolute KEY to success.

For those who don’t want to manage their entire portfolio, I highly suggest checking out Whitney George’s Sprott Focus Trust (FUND: Nasdaq), where your money can be managed by a man who has a very good track record for success and, as he says, where he “eats his own cooking,” by being a major shareholder of the fund.

Also, personally, I’m really looking forward to attending the Sprott Natural Resource Symposium in July, and think that it is a MUST-attend event for anyone who invests in the junior resource sector.  Being at the conference gives you the chance to see and listen to a fantastic group of speakers, which includes Rick Rule, Doug Casey, and James Grant, just to name a few. I hope to see you there!

 

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Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company(s) and sector that is best suited for your personal investment criteria. Junior Stock Review does not guarantee the accuracy of any of the analytics used in this report.