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LETTER TO SHAREHOLDERS
Dr. Thomas Kaplan | chairman, board of directors
Both my education and professional experiences in natural resources over the past two decades have convinced me of at least two things: that Fortune sometimes can have a wicked
sense of humor, and that, while history may not quite repeat itself, it unquestionably rhymes on occasion. As one whose career has revolved around a fascination with, and big bets on, the rhythmic nature of human behavior and market cycles, I have made understanding these elements a key ingredient in an investment strategy that accepts,
and indeed embraces, the belief that some fundamental truths don’t change, even if the variables that coalesce into an investment case can gestate slowly. A corollary to this approach is that one should never get too emotional about an asset class. This includes commodities,
the arena in which I have pursued my vocation. Having no formal training in engineering or geology that would bias my thinking toward following a path in industry or natural resources, I am active in the sector for a strictly utilitarian reason: because I believe I know how to make money in it. I am the rst to admit that I experienced beginner’s luck on my inaugural attempt at exploration, with silver in the 90s. And outrageously good fortune persisted in platinum and hydrocarbons.
I was simply in the right place at the right time with the right assets.
I reckon the same is taking place in precious metals again. My buona fortuna – not only in identifying exceptional assets to express a thesis, but also in nding exceptional colleagues who are at the top of their game in sourcing and developing these assets – is without a doubt more pronounced now than at any time in my career. I don’t make such a claim lightly.
Having worked together for as long as two decades, my team and I have devised a method that seeks to distill our track record into something of a technique. The aim is to mitigate risk, even if that means more than our fair share of errors of omission, in order to focus on nding the category-killer plays that can reward us for our discernment but also o er the maximum returns. This implies the following: identifying the sector that we believe, from a top-down
standpoint, will make us tens of times our money if we are right; sourcing the category-killer assets with which to leverage that thesis
– and provide the attributes that will deliver excellent returns even if the macro thesis takes time to unfold; and working with the smartest people who can not only brutally vet those assets but also have the courage to challenge every assumption about our strategy. To such quantitative and qualitative discipline, we would add the critical intangibles that underlie success in this space: patience and upholding a sense of conviction that allows one to withstand adversity – as well as the occasional agony of waiting for the revaluation of these assets. This approach has worked particularly well for us in the sphere of natural resources. Because we have had experiences of multiplying invested capital a hundred-fold following this model, the fact that
our patience has been rewarded on occasion in silver, platinum, and hydrocarbons provides a serenity that is, admittedly, a luxury.
This serene luxury is a haven in and of itself. The world today is in uncharted waters in so many arenas – economic, social, and political – that any thoughtful analyst has to contend with anticipating a myriad of scenarios as he or she deploys capital. I for one believe that an asset that cuts through the noise very succinctly is gold. I fundamentally believe it is an asset that should do well if the world does well. It also will do well if the world doesn’t do well. I normally prefer to focus on the sunnier of the propositions and eschew what I call the fear factors. It’s always been my conviction that, if one can’t justify a proposition using only Economics 101 – supply and demand – then the investment thesis should be treated with an arched eyebrow. That having been said, as the next leg in gold’s bull market is likely to nd its ex post facto rationale to be one or other of these fear factors, then I am willing
to play along. And maybe I will even make a grudging nod to the argument as well.
Indeed, this past October, there appeared an elegantly written piece by Cameron Crise for Bloomberg entitled “Is Gold Really a Good Hedge?” The subtitle was itself telling: “Bloomberg’s Macro Man columnist set out to test whether gold really o ers protection against market turmoil. What he found was a bit of a surprise.”
Let me quote directly:
Gold bugs point to a myriad of reasons to own their favorite metal, from at currency debasement to gold’s history as a monetary unit. Among the favorites, however, is gold’s utility as protection against
a market or political crisis. In August, for example, Bridgewater Associates LP’s Ray Dalio suggested investors should hold 5 percent to 10 percent of their portfolios in gold to hedge against rising political risks. I’m a macro strategist who writes Bloomberg’s Macro Man
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