(Interviewed by Louis James, Editor, International Speculator)
L: Doug, a lot of our readers have asked for you to tell some war stories – what were some of your biggest wins and losses, and what were the lessons learned?
Doug: Well, it may not all fit neatly under the rubric of “Lessons Learned,” but I can tell you about some of the specific experiences that have shaped my career. There have certainly been some great deals and terrible deals that I’ve been in – and just as many of both that I’ve failed to get in.
L: It’s all part of what Victor Niederhoffer would call The Education of a Speculator.
Doug: Vic’s an old friend of mine, and his book by that title has some important insights. Although he’s mainly a short-term trader. I prefer to only buy things I can hold on to for a few months, if not a couple of years. It gives you enough time to be right. And doesn’t clutter your mind up with random noise and fluctuations.
L: Indeed; let the trend be your friend. Okay then, where do we start?
Doug: We’ve already told the story about my Ferrari business, in our conversation on cars, but that was my first business deal, so I do recommend reading it to those who haven’t yet.
L: So, when you got out of the hospital, did you dive right into another deal?
Doug: Actually, I decided to start really educating myself at that point. Among other things, I read Harry Browne’s seminal book, How you can profit from the coming devaluation, and that led directly to my first big score in the market. I read that book in 1970, and I bought gold coins. More important, as it turned out, is that I bought gold stocks and had a wild ride from 1971 to 1974. I made a lot of money, in percentage terms at least, since I was just out of school and had almost no capital to start with.
I then launched my second business venture—
L: Wait, wait… There was a big slump in gold in the mid-‘70s. Are you saying you bought early, before Nixon closed the gold window, and then sold at the top of that first surge, realizing gains before the slump?
Doug: Yes, I did. But it’s not as heroic as it sounds – I had no crystal ball. I sold near that interim top to invest in my second business, which was a company to market precious metals to the public. I have to say that I learned more painful lessons on that deal than I did crashing the Ferrari. Not only did I lose all the money I had built up, but I lost a bunch of money I didn’t have. It took me years to dig myself out of that hole. I never declared bankruptcy, but I had significant negative net worth for some time.
L: That brings up an interesting point. You’re a libertarian, and libertarians believe in the sanctity of the contract. That being the case, are there any moral grounds under which a libertarian can declare bankruptcy? There were times in my past when I was pretty deep in the red as well, and I couldn’t bring myself to file for bankruptcy, even though it would have taken a great pressure off me. I’d made promises, and I just couldn’t break them.
Doug: I completely agree with that, and that’s why I didn’t declare bankruptcy. I’ve always considered bankruptcy to be the act of hiding behind the state for the purpose of defrauding your creditors. It may be legal, but it’s unethical; there’s increasingly only an accidental overlap between what’s legal and what’s ethical. But most debt today is owed to banks. I have to wonder, with the banks increasingly becoming creatures of the state, if the morals involved haven’t become inverted in today’s world.
L: It could be a moral positive to borrow money from the government and then declare bankruptcy to help hasten the state’s own demise?
Doug: [Chuckles] Could be. Inflation is well known to corrupt a society’s morals in many ways. It’s a dangerous thing, a slippery slope, to start rationalizing why one needn’t make good on debts. But that’s what’s happening all over the U.S., with people walking away from their mortgages and their credit card debt, and declaring bankruptcy in record numbers. It’s a trend that’s going to end very, very badly.
What the state has done by increasingly insinuating its tentacles into every aspect of life is to completely corrupt society. Both the intended and unintended consequences are going to be ugly, because it blurs the morality of daily life. It’s entirely perverse that defaulting on debts can even be considered as a good thing, and inversions like this are proliferating.
L: We should do a conversation devoted to ethics – someone sure needs to. But let’s go back to the ‘70s. What happened next?
Doug: Well, I had to dig myself out of that hole, so I redoubled my efforts to earn money. One of the things I did to earn money at the time was to write my first book, The International Man.
L: And thus was born a guru …
Doug: Well, it was Crisis Investing, a couple years later, that really put me on the talk show circuit. The other thing I did back in the mid-‘70s was to become a stock broker. Have I told you the story of how I managed to buy precisely at the very bottom of the mid-‘70s market trough?
L: No, please do.
Doug: I became a stock broker in 1976, which was fortuitous timing for someone who liked gold stocks. So, I’m sitting there at my office in Washington DC, and I got a call from a guy – his name was Elmer – who impressed me as being one of these rich good old boys. I talked to him about what I thought would be good investments for him, and he said, “I’ll come into town and put a little bit of money with you.” The way he talked, I thought “a little bit of money” was going to be several hundred thousand dollars, at least.
When he came in, it turned out that he was an average Joe who rode in on a bus and really didn’t have any money to speak of. But I put a portfolio together for him, worth about $2,500, which included a thousand shares of a stock called Grootvlei, a thousand shares of Bracken, and several hundred shares of Anglo American Corporation of South Africa. Because gold had fallen almost 50%, from $200 at the end of December 1974, Grootvlei and Bracken were penny stocks – substantial producers, but with high cost and short-life mines – that were each yielding indicated dividends of about 50 to 75 percent. Even Anglo was yielding something like 15%.
L: Those are pretty amazing dividends.
Doug: It’s incredible what you can get in dividends alone when a market is at a bottom – something people seem to have totally forgotten about today.
At any rate, the day Elmer came in happened to be the day that gold hit its absolute bottom for that cycle – $103.50, if I recall correctly – and also happened to be the very same day there were big riots in Soweto that made headlines in the U.S.
So, Elmer gets hit with these two things at the same time, calls me back up and says he wants to cancel his order. I said: “Elmer, this isn’t Woolworth’s. You can’t really take the merchandise back.” But rather than paying me for what he ordered, he hung up the phone on me.
Having entered the orders for the stocks the previous day, I had to ask myself what I would do about it. It was something of a revelation to me – it was clear that I was dealing with a typical member of the public, a representative of their mindset. I figured he must be the perfect contrary indicator. In today’s terms, I had to ask myself if I was just talking the talk, or if I was willing to walk the walk.
So, I journaled those stocks I bought for Elmer into my account and held them until I sold in 1980 or thereabouts. By then, I was getting several times, annually, what I paid for them in dividends alone. It was a fantastic hit, at least in percentage terms.
L: So it was an accident?
Doug: Yes, completely. I didn’t know it was the bottom. I just knew the stocks were really cheap. I believed what I had told Elmer about those stocks, and I figured it was more intellectually honest to keep them.
It turns out that I was right. People didn’t want stocks that were off 90% and yielding 60% – they figured there had to be something wrong. They’d rather buy something that’s gone up ten times, proving it has a good “track record.” Track records are the best way to judge people, but the worst way to judge stocks.
L: I don’t think I’ve ever heard of anyone picking the exact bottom of that cycle.
Doug: I got lucky, but it’s a perfect example of why it’s essential for a speculator to be a contrarian. You’ve got to believe in your thinking enough to buy when everyone else is selling, even with frightening images on TV, like the riots in Soweto. That’s why it’s critical to have an understanding of economics, politics, and the technical details of various businesses; only then can you hope to be immune from the blather you’ll hear on TV and read in the popular press.
And when it came to gold, few people had a clue. I remember one politically connected investment guru of the day – Eliot Janeway – saying, that if the U.S. government didn’t support the price of gold at $35, it would fall to $8. He didn’t have a clue. But he influenced scads of people.
L: That’s a great story. What a pity for good old Elmer.
Doug: Yes. I have no idea what happened to him after he hung up on me, but I thank him for appearing at the right time. Elmer was completely ignorant of economics and the markets, but he nonetheless taught me a more valuable lesson than any teacher in four years of college.
L: So what happened next?
Doug: The late seventies were very good to me, despite the fact it was the worst time for the economy since the Great Depression – high unemployment, high inflation, and skyrocketing interest rates. I was making great money in my regular business, royalties from The International Man, fees from speeches and occasional articles – and putting all my savings into mining stocks and gold, which was on its way to $800.
I wrote Crisis Investing in 1978. It was published in 1979 and hit #1 for many weeks on the New York Times Bestseller list in 1980. Then, in 1982, I wrote Strategic Investing, which was more focused on the stock market, Dow Jones-type stuff. I got a very large advance, $800,000, from Simon & Schuster. That’s a lot of money today, but was a lot more money back then, and it confronted me with the question of what I would do with the cash.
I can’t say that I thought gold was done then, but the gold stocks didn’t seem as cheap, so I bought things like Treasury bonds, which were yielding 12 to 13 percent, and electric utilities, which were also selling for 12-15 percent yields, and other things I recommended in the book. It’s an excellent book, still worth reading today. I was dead right about the markets, even though I foolishly remained bearish on the economy – the markets and the economy are not at all the same thing.
L. That was at the beginning of the 20-year bull market for Wall Street.
Doug: Yes, it was my next big hit in the market. At the time, the DJIA was less than 1,000, and I said it was going to 3,000 – which was an outlandish and outrageous prediction. Unfortunately, I didn’t keep the things I bought long enough – I didn’t think the bull market in stocks or bonds would go on anywhere near as long as it did.
I was gone by the time it hit 3,000. That was one of the biggest mistakes of my career. I didn’t foresee interest rates dropping as long and as far as they did, eventually driving stocks and real estate to manic heights. I could have held on and done almost nothing else for the next 20 years, but I didn’t. Nonetheless, I bought pretty close to the bottom and held on for a good, long run.
L: So what did you do after cashing in, in the ‘80s?
Doug: That’s when I started getting into the mining stocks you now cover. I liked their incredible volatility. But it took me quite a while to really understand the way the game was played. Even though the third thing I wanted to be when I was a kid was a geologist, it took me years to get geologically active, so to speak. But no regrets. It was a great time to get into the field, because there were some fantastic gold stock runs in the ‘80s, right up to the Bre-X scandal in 1996…