Let’s say you have a major business decision.
It’s come up because you have a large chunk of money set aside. You’d like to see it grow into a much bigger chunk of money…one that can ensure your family’s financial wellbeing.
You know owning good businesses is a cornerstone of building wealth, so you’re going to buy an ownership stake in a local business. It’s a beer brewing company.
You have two potential operating partners in this business…
One is Brad, a 35-year-old guy you’ve spoken with at several cocktail parties. He’s a fun single guy known for being flashy and loud. He wears a big Rolex and drives a brand new Porsche (neither are paid for).
Brad is ambitious, but his business track record is spotty. Several of your most trusted business associates don’t trust him.
Your other potential partner is Charles, a 53-year-old guy who has been doing business in town for over 30 years. He has three kids in school. He drives an old pickup truck. He has a fantastic reputation. Everyone who has worked or invested with Charles raves about his integrity and his knowledge of the beer business. He’s serially successful.
With these facts in mind, who would you rather partner with?
If you’re like me, you picked the guy with modest spending habits, a great reputation, and a long history of success. All things being equal, most reasonable people would rather invest with a proven winner.
You might think this is an exercise with no purpose. But it actually has enormous implications on your wealth.
You and I face this kind of decision every time we consider investing our hard-earned money in a public company. Making the right choice can mean the difference between making multiples on an investment or losing money.
And while making the right choice in the scenario above was simple and obvious, logic often flies out the window when you buy stocks.
My goal with this essay is to help you always make the right choice.
Have You Made This Mistake Before?
There are over 10,000 publicly traded companies on the North American stock exchanges. There are over 3,000 mutual funds.
Throw in hundreds of TV “talking heads” who have differing opinions on everything, and it’s easy for an individual investor to get overwhelmed. It’s easy to forget basic common sense that will help you safely and surely build wealth.
For example, after reading about the choice between Brad and Charles, you probably thought, “Of course I’d rather partner with the proven winner!” But if you’re like most of us, you’ve made the mistake of investing with unproven losers in the past.
Remember, when you buy shares of a public company, you are buying shares of a real business. You become an owner of that business. You are buying a claim on the company’s assets and future cash flows. The managers of that business become your partners.
As I mentioned…if you’re like most people (myself included), you’ve partnered with some people who were either unproven, dishonest, incompetent, or all three. It’s easy to get caught up in a good story and invest without making sure you have solid partners.
But again, when you buy a stock, you become a business owner. That’s why you should treat your money with respect and only partner with proven winners. Success breeds success. Winners tend to keep on winning.
That’s why at Katusa Research, the single most important factor in our business analysis is the people running the business. It’s even more important than the quality of a deposit or the company’s financial position.
In the resource business, many people think that if you just find a good deposit in the right country, you’ll make money. But an incompetent or unscrupulous management team will make your investment a loser, despite the quality of the deposit. They’ll find a way to screw it up.
They’ll dilute your stake by issuing too many new shares. They’ll take on foolish levels of debt. They will panic at bottoms and sell assets for much less than they are worth. They will panic at tops and buy assets for much more than they are worth.
High quality owner/operators will do the opposite of all that. They will find a way to win.
Everything depends on the quality of the people.
For example, if the metals sector is very cheap, I’m going to want to invest with Ross Beaty. Ross is a serially successful billionaire entrepreneur who built Pan American Silver into one of the world’s largest silver companies. Investors made over 900% in under seven years. He built Lumina Copper into a huge winner in the copper space. Investors made 2,642% in under four years.
Given Ross’ history of success, it’s obvious why you’d rather partner with him than hundreds of other managers. Yet, many people decide to partner with those other managers. They choose SPAM over filet mignon.
Another guy I always look to invest with is Lukas Lundin. Lukas is the son of the legendary resource entrepreneur Adolf Lundin…but Lukas is a legend in his own right. I’ve done business with Lukas, and I know him personally.
He’s a first class person all around. The Lundin name is synonymous with success in the resource sector; they know how to buy low and sell high as well as anyone.
They’ve delivered extraordinary returns to investors, like a 2,508% gain in Denison Mines in under five years…and an 1,138% gain in Tenke Mining in just three years. Investing with the Lundins is how my readers made over 600% in Africa Oil.
Proven winners also tend to attract the right shareholders. I’m talking about expert institutional investors who think long-term. This is key because the other shareholders are essentially your partners in the business. The right shareholders will do what is right for the long-term interests of the business. Getting the benefit of good partners is icing on the cake when you invest with proven winners like Ross and Lukas.
Long time readers know I’m a big believer in the Pareto Principle. It states that 80% of your results come from 20% of your efforts. For that reason, it’s also called the “80/20” rule. For example, your business may generate 80% of its sales from 20% of your clients.
The Pareto Principle is alive and well in the resource sector. About 20% of resource operators create 80% of the value in the sector.
I’ve even taken Pareto’s principle a step further. Years ago, I coined the 64/4 Rule—I took the 80/20 Rule and subjected it to Pareto’s principle again. The result states that 4% of entrepreneurs create 64% of the wealth (80% of 80% is 64%, 20% of 20% is 4%, hence the 64/4 Rule).
If making a lot of money is your goal in the resource sector, I encourage you to do what I do; focus on the 4% of superstar entrepreneurs who own large stakes in their own companies. Invest with the best. The choice is often as simple and obvious as the choice between Brad and Charles.
Success tends to follow success. Winners tend to keep on winning.
Those are the guys you want your money with.
PS. Having the right management teams at the helm is the most important aspect of where I put my money. You’ll also want to read this article to find out why “Skin in the Game” is just as important.