Top Podcasts 2020 – Replay: Rick Rule, Joe Davis, Tom Basso | #277

Episode Summary

Executive Summary: This mashup centers on three investing philosophies: Rick Rule argues natural resources and precious metals are attractive due to low rates, fiscal strain, and contrarian opportunity; Vanguard’s Joe Davis frames a subdued-return world with valuation-aware, distribution-based forecasts but highlights upside from innovation and a broader global market; Tom Basso explains trend following, emphasizing position sizing, drawdowns, and the outsized impact of a few winning trades. Across all three, process, humility, and long time horizons matter more than prediction.

Main Topics: Precious metals and natural resources as contrarian opportunities (Priority: 5/5): Rick Rule argues gold, silver, uranium, water, farmland, and other resource assets are compelling when they are cheap versus cost of production and widely disliked, especially amid weak real rates and sovereign-debt concerns. Vanguard’s subdued-return outlook and capital markets model (Priority: 5/5): Joe Davis explains how Vanguard’s model uses macro factors and valuation controls to generate return distributions, leading to lower expected returns for many assets over 5-10 years, especially in U.S. equities and bonds. Innovation, the Idea Multiplier, and long-term growth upside (Priority: 4/5): Davis describes a massive data project that tracks published ideas and citations to forecast future productivity, suggesting innovation may reaccelerate in areas like genetics, energy, materials, and transportation. Trend following, position sizing, and behavioral discipline (Priority: 5/5): Tom Basso emphasizes that trading success depends less on predicting direction and more on sizing, stop discipline, and surviving long enough for outlier winners to pay for many small losses. Long-horizon investing, rebalancing, and implementation (Priority: 4/5): The guests repeatedly stress written plans, realistic holding periods, rebalancing, and avoiding emotional reactions to short-term performance or drawdowns. Changing demographics and investor education (Priority: 3/5): Rule and Davis note younger, global, and female investors are increasingly interested in precious metals and broader investing education, influenced in part by crypto skepticism and online content.

Key Arguments: Natural resources are best approached contrarianly because capital-intensive industries can become oversold, forcing prices far below cost of production before rebounds occur. Gold is attractive not mainly because of geopolitics, but because fiat currencies, sovereign debt, and negative real yields reduce the opportunity cost of holding precious metals. The market share of precious metals among U.S. private savings was far below historical norms, implying meaningful reversion-to-mean potential if sentiment normalizes. Vanguard’s 5-10 year outlook is subdued because starting valuations and low real rates compress expected returns; short-term forecasts are less useful than distributional thinking. Standard CAPE comparisons can mislead unless adjusted for interest rates, inflation volatility, and regime changes; fair-value valuation levels are not constant over time. Vanguard’s idea-multiplier work suggests innovation may be reaccelerating, which could lift productivity, growth, and even value-oriented sectors over the medium term. Most jobs will evolve rather than disappear from automation because occupations are bundles of tasks, many of which are complementary to technology. Trading performance is driven heavily by position sizing and risk control; a random entry system with strong sizing and exits can be surprisingly robust. A few outlier trades often determine annual performance, so trend followers must capture big winners and avoid small losses becoming catastrophic. Investors should plan exits before entries, write down thesis and invalidation points, and rebalance systematically to reduce emotional decision-making.

Data Points: Gold price change (1970s): $35/oz to $850/oz - Rick Rule’s example of the 1970s precious-metals bull market Copper price change (1970s): ~25-30 cents/lb to $1.50/lb - Rick Rule describing the 1970s commodity boom Oil price change (1970s): $3 to $30 - Rick Rule citing the historical resource cycle Cropland lost to urbanization: 4.8 acres per minute (1997-2022) - AcreTrader sponsor discussion on farmland scarcity Retail inquiries to Sprott: ~2,000 inquiries in the final three months of 2019 - Rick Rule discussing rising interest in precious metals Share of inquiries outside North America: 40% - Sprott’s inbound retail interest was mostly non-U.S./non-Canada Younger investor share: 65% sub-40 - Rick Rule noting demographic broadening in precious metals interest Female investor share: More than 30% - Rick Rule noting unusual female participation in resource investing Precious metals share of U.S. savings/investments: <0.5% - Rick Rule’s argument that precious metals are underowned Precious metals share in 1991: ~8% - Historical benchmark used by Rick Rule Three-decade average precious metals share: 1.5%-2% - Rick Rule’s mean-reversion argument U.S. federal on-balance-sheet liabilities: >$22 trillion - Rick Rule’s discussion of fiscal strain U.S. federal off-balance-sheet liabilities: ~$100 trillion - Social Security/Medicare obligations cited by Rick Rule Annual U.S. deficit: ~$1.4 trillion - Rick Rule’s argument about debt service pressure Oil breakeven/cost of production: ~$60/barrel - Rick Rule citing IEA-style fully loaded production costs Oil spot price example: ~$40/barrel - Rick Rule’s example of underinvestment pressure in oil Uranium production cost: >$50/lb, likely closer to $60/lb - Rick Rule’s bullish contrarian uranium case Uranium spot price: $27/lb - Rick Rule’s example of undervaluation U.S. nuclear baseload share: 15% - Rick Rule arguing uranium demand remains necessary Vanguard U.S. equity expected return: 3.5%-5.5% - Joe Davis referencing Vanguard’s 2020 outlook range Vanguard non-U.S. equity return advantage: 300-400 bps higher on average - Joe Davis on expected relative outperformance abroad Global equity expected return (Vanguard early model): ~9% annualized - Joe Davis recalling 2009/2010 forecast Inflation central tendency in Vanguard model: ~1.5% to <2% - Joe Davis’s adjusted assumption versus 1960-onward averages Historical inflation average starting in 1960: ~3%-3.5% - Joe Davis arguing historical averages can be misleading Historical average real short rate: ~50 bps - Joe Davis on long-run real rate normalization Model fit improvement with adjusted CAPE: Out-of-sample predictability improves from ~30%-40% to >50% - Joe Davis describing valuation model enhancements Idea multiplier historical ratio: ~200 ideas per influential idea - Joe Davis’s measure of idea diffusion Idea multiplier in genetics: ~400 ideas per influential idea - Field identified as especially promising Data records analyzed: ~2 billion records - Joe Davis describing the scale of the idea-multiplier project Jobs potentially affected by automation: ~20% with significant downward pressure - Joe Davis’s task-based labor-market research Occupations changing rather than disappearing: More than half - Joe Davis’s estimate of evolving job task profiles Job task profile change over a decade: ~50% - Joe Davis on how much work tasks have shifted Basso’s early futures capital: $2,000 - Tom Basso’s first corn trading account Basso’s silver account value during squeeze: ~$130,000 to ~$500,000 - Tom Basso describing the Hunt silver squeeze trade Basso’s TrendStat annual return example: ~8% - A year when two trades made the difference between profit and breakeven Basso’s long-term win rate estimate: ~33%-35% - His estimate of trend-following trade accuracy Potentially automatable jobs estimate: Up to 50% in 10 years (cited as a claim in research) - Joe Davis referencing broader automation debates Pension return expectations: 6.5%-9% commonly expected - Joe Davis discussing unrealistic institutional assumptions

Pivotal Quotes: "In resources you are either a contrarian or you are going to be a victim." — Rick Rule: Rule’s core philosophy on natural-resource investing and cyclical oversold sectors "The market will do what the market will do." — Tom Basso: Basso’s reminder that trading is about plan execution, not control over outcomes "I believe mean reversion is the most powerful force in finance." — Joe Davis: Davis explaining Vanguard’s valuation framework and long-horizon return expectations

Implications: Listeners should expect lower long-run returns in traditional assets, but also potential upside from innovation and out-of-favor sectors. Across all three guests, the edge comes from discipline, diversification, and patience—not prediction.