Sheri Manson
The last time we spoke with Eric Sprott, in 2007, the notoriously bearish hedge fund manager was being touted as the best fund manager in North America-his flagship Canadian Equity Fund is still clocking a stunning 22% average annual return for the decade. The fund is down 29% for the year ended Aug. 31, however, and redemptions have driven a Hummer-sized hole in the firm's profits. Despite a growing sense of optimism on the Street, Sprott isn't unzipping the bear suit just yet.
You seem relaxed. [Laughs]I'm not relaxed. This is extremely stressful. These markets are the most difficult I have seen in my career. No one wants to underperform. No one is comfortable when they are underperforming.
How do you cope with the stress, and the fact that you're lagging? I revisit the data. I always want to make sure I have the facts right. So at a time like this, I go back to the screens, and I review all the information that's guided my views. And the facts still support my view.
What is that view? Our thesis was the financial system was fundamentally broken. We all know what's happening here. The Fed is printing, and we are buying. We didn't solve the financial problem. We simply moved it, from the balance sheets of the banks to the balance sheet of government, which means we, the people. But the problem isn't solved.
So what's next? You have people like Marc Faber [author of The Gloom, Boom & Doom Report] warning that hyperinflation is possible in the U.S. Now, Faber may be extreme, but he's a smart guy. And look at what is happening when the FDIC [Federal Deposit Insurance Corp.]bails out these banks. Assets are written down by something like 70 cents on the dollar. That supports our thesis that the financial system is fundamentally broken.
And despite underperforming, are you sticking with your call? No, we've changed a number of things. We stopped shorting stocks that were trading for less than $2. It simply became too risky. In this market, the weakest companies have been the best performers. I've sold some bullion and moved that money into gold stocks. You get more upside by owning the producer than the bullion.
Where do you see potential in this market? We have bought at least 20 gold companies changing hands at five times their expected profits in 2010. They have proven managers, and proven reserves. These stocks are cheap, by any measure. When you can buy any stock at five times next year's earnings, without having to stretch your assumptions on the prospects for the company or the economy, that's a cheap stock.
Why the preoccupation with gold? Gold has proven an excellent means of preserving wealth. Look at its performance over the decades. Gold has done everything an investor could ask of it.
You've lost some personal wealth this past year. Will you give less to charity? No, not at all. The foundation I created was funded in part from the proceeds of [Sprott Asset Management's]IPO. So the foundation is well capitalized. We will give away more, not less.
What is the mood internally at Sprott Inc.? What are your colleagues saying to you? Do we have differences of opinion? You bet. We disagree all the time. But do they say, Eric, you're stupid and washed up? No. They understand how I reached my views, and they respect my approach. There's more than one way to win this game. You can win with growth, you can win with value. But you need a disciplined approach.
Do redemptions bother you personally? I respect that clients have to make their own calls on their money. You can't take the redemptions personally. I think the test is to stay true to your convictions. That's where I would really feel stressed, if I were behaving in a way that wasn't faithful to what I believe to be true.
Andrew Willis