I've been meaning to blog about this for many months now and tonight I finally took the time to re-watch the Sprott October 2007 Advisor Breakfast and take notes on what Eric Sprott said.

• Should give everyone a T-shirt that said:  "I survived the volatility of the Sprott Canadian Equity Fund".  It has been one hell of a ride.
  
  
• All portfolio managers [at Sprott] are totally different.  What John Embry does in gold and what I do in gold is different.  What I do in equities and what Allan Jacobs does is different.  Always been a great believer that you have to find a way to be successful, and whatever way it is, is the business you have learn and hone your skill at.  And each one of these people have been around a long time have honed on that skill and learned to create an outperformance environment.  I've always thought that when one buys stocks you could buy them on the new high list, you could be a guy that buys on them on the new low list, you could be a growth guy like Peter Hodson, you could be a value guy like Allan Jacobs, there's a million different ways to beat the market but you have to hone your skill and learn to do it.  And I can assure you that our people have all done that.
  
  
• Allan Jacobs has joined Sprott.  Known Allan for a long time during past 14 years.  I can always tell when a guy is a really good portfolio manager when he is a tough sell.  And Allan always was and is a tough sell.  Because he's very careful, he's timely, he does more due diligence than any person I've ever seen.
  
  
• Have a team of 8 analysts and always prepared to hire more.  One thing that one is aware of in this business is that performance is everything.  And if you can get one analyst to give you one idea a year it will certainly pay for itself when you're running $5.5 billion.
  
  
• Onto trashing the economy.  Wants to talk about 3 thematic things that have been very key to us for a long time:
• Peak Oil
• Levered Finance
• BRIC - that the less developed countries will carry the freight for the developed countries whose economy growth is kind of waning here.
  
  
• Peak Oil.
• The Cantarell field and the Ghawar field are the two biggest fields in the world.
• The Cantarell Field in the last 3 years have suffered a devastating decline in production.  It has gone from 2.5 million barrels to 1.3 million.  To get 1.2 million barrels a day of production in the tar sands would take you 10 years and $120 billion dollars.  It is not an easy thing to replace.
• Historically the depletion rate in oil wells was always considered to be something like 4%.  Our view is that technology has increased the rate of depletion.  Because we find ways to get it out faster which depletes it faster.
• There is some thought that Cantarell could go as low as 550,000 barrels a day in two to three years.
• In the case of Ghawar, which produces about 4.5 million barrels a day, Saudi Arabia pumps something like 6 to 7 million barrels of sea water into the field every day to maintain the pressure.  So the same thing is going to happen when it waters out, which all wells have to water out some day, the impact on oil production out of Ghawar - which is the largest field in the world at 5% of the world's production - is going to decline.  The petrophysicists believe that Ghawar is in rapid decline today.  There's no transparency, but we do know that Saudi Arabia is spending huge amounts of money drilling more wells.  But we also know that production is not going up.  So if you're spending $10 and $20 billion a year on new production and you identify new fields, but your production is not going up, and that production is coming on, something is going down.  And the petrophysicists all believe that the Ghawar field is going down.
• While we're on depletion, some of the world's experts keep raising the rate of the world's depletion.  Now at 8% depletion which means if you are producing 85 millions a day and you're at 8% depletion, you almost have to replace 7 million barrels in a year.  That is incredibly difficult.  Our exploration success peaked out in 1960.  For every 6 barrels of oil that we consume I think we find 1.5 today.  You can't consume 6 and find 1.5 - you will have peak oil.  Now the question was it in ‘05 or is it going to be in 10, 15 years....you know it really doesn't matter when peak oil is going to be.  Because the other side of the equation is the demand for oil is "relatively sky-rocketing".  You look at the demand from the BRIC countries - it's incredible.  China's industrial production is growing at 16% a year, their demand is going up.  Their oil imports were up 600,000 barrels.
• Everytime we're looking at oil projects they are ever getting delayed.  Like recently Chevron and ENI.  We see so many problems with anybody trying to produce anything these days.
• Russia has been the saviour to the world over the last 10 years.  Because they have gone from 6 million barrels to 9.8.  They are now the largest producer in the world.  Yet again the petrophysicists think that Russia is ready to peak out.  We don't want to be putting an 8% decline rate on Russia because we will never be able to deal with that.
• We always have unexpected events in oil.  Unexpected large shutdowns, hurricanes, etc.
• These are all things that make us believe that Peak Oil is here.  And the one thing that makes us most believe that Peak Oil is here is the price of oil.  The price of oil is talking to us.  It's telling us we have a problem.
  
  
• Levered Finance.
• Always a believer that the financial system is grossly overlevered.
• Look at the volatility of anything: subprime, currencies, stock markets, bond markets.  You see some of the losses people are incurring.  The system is so fragile because of the leverage and because of the way people borrow short and lend long.  Here we have things like Northern Rock that just dies so fast and is just gone in a couple of weeks because of over-leverage.  Conventree.  How long did that take?  The stock was at $10 and a couple of days later it was at $2.  Essentially they have no solvency, they aren't bankrupt, but they have to rely on others to provide liquidity.
• One of things that is kind of odd about the banking business today is that there are 3 ways of valuing things:  mark-to-market, mark-to-model, and mark-to-myth.  These are allowed methods of valuing your assets.  The last one is like "best guess".  What is your best guess?  You sense that it is worth this so you are allowed to say it's worth that.  And don't think that banks don't do this.  We're aware of banks in the States that have 10% of book value, which is 200% of their capital, on a 20-to-1 leverage ratio, that's marked to best guess.  That's why we hardly ever see any volatility in bank earnings.  I am shocked at the lack of volatility in bank earnings with financial markets being as chaotic as they are.
• We still have $400 trillion of derivatives out there.  No matter what it is that you have derived, it's volatile.  Gold, oil, wheat, cotton, bonds, stocks...it's volatile as can be.  You have $400 trillion of stuff that is going up and down.  You know 1% of $400 trillion is $4 trillion.  Well the world's never made $4 trillion.  Ever.  And people might say well it's all offsetting, for every long there is a short.  Well I say look for every long there is a short then why do we do it?  Somebody's gotta be taking some risk here.  But you rarely seem to see the results of all of that.
• Because of our concerns of levered finance, our last Markets at a Glance had two words:  Buy Gold.  The next one will probably be:  Sell Stocks.
• We've suffered a financial meltdown.  The markets seized up.  Let's not kid ourselves.  The markets seized up in the middle of August.  I find it shocking that stocks have done so well since the middle of August.  It's all this "let's just throw money in it and let's solve the problem".  One of the things when I think about levered finance, and when I think about what the central banks do, what the stock market is doing, what the bank stocks are all going up, I actually think of the word "farce".  I actually think the whole financial system is a farce.  You get totally out of control, you have a system that is unwinding, and what do you do?  You throw more money at it.  Well what caused the first problem?  Money was too liquid and too liberal and too inexpensive.  So we cut rates and give them more money.  We're basically throwing gasoline on the fire here.
• I don't believe in central banking.  And by the way, just so you might not think I'm the only idiot out there, they interviewed Warren Buffett the day that the Fed rate was coming and they said "Well Warren, what do you think today?  Are they going to cut 25 or 50?"  Warren Buffett says "I don't give a damn.  And I will never give a damn what the Fed does.  What does it got to do with anything?"  And I just put it on the table because Warren has done okay, by ignoring what the Fed does.  And I hope we do okay by ignoring what the Fed does.
  
  
• BRIC influence.
• The imports and exports both changed in the last 8 months by 23%.  And I regard imports and exports as reality - that's real things moving.  These kinds of numbers are just staggering how large they are.  Industrial production in India is up by 12%.  These are huge populations, in some cases they are already the biggest producer of a whole bunch of things.  
• One of the things that I almost struggle with these days is that it is more important to watch the Chinese economy than anything else in the investment business.  It's way more significant than the US economy in my mind, particularly as Canadians who are involved with resources.  You have to know what is going on in China, that will determine the fate of most of the things that a lot of us invest in at Sprott Asset Management.
• The real world's happening out there where things are really made, and ultimately where they'll be consumed.  In China and India and other developing countries.
  
  
• The next topic is Performance Review.
• Our Canadian Equity fund has compounded at 27.29% for 10 years.  We're very proud of that number.  If you look at the inception of any of our funds on this list they have been absolutely spectacular.  Again I would like to reiterate that the theories employed and the actual tactical way that all these results are produced are quite different amongst the various managers.
• We wanted to compare our performance to other people who have good 10 year performance.  Our fund is up by 27% and our closest competitor is up by 22.3%.  So we've had a pretty sound outperformance and we certainly hope it will continue based on how things are going.
• $10,000 invested in the TSX 10 years ago would be $23,914 whereas invested in our fund would be $111,672.
• Was it a fluke?  Unofficially, we've been running money since 1982.  And people who would have put $10,000 in 1982 would be worth almost $4 million.  And we have customers who have been there - we can show you the living examples of that.
  
  
• Onto the topic of Risk.
• The minute you buy small stocks or unusual stocks it's considered very risky.  I happen to not believe that.  In fact, one of the reason I don't like buying big stocks is because everyone has been all over them and they have been mulled to death.  There's nothing in them in my mind on a relative basis.
• For those who want to take a really hard look, there are lots of things that aren't risky where you can get a super-outsized return.
• The Canadian Equity fund has about 29% on average in cash and bullion.  We happen to think that bullion is a very safe investment.  Well I know that buying gold stocks will produce a better return than gold.  But, in a worst-case situation I would much rather own the gold.  Because it's a real thing, it's going to maintain its value, and I think our fund holders will be rewarded in the end in case the system somehow implodes.
• We got involved in gold in 2000.  It has gone up 1,100% from 2000.  We took a big stake in ‘00/'01 because all the data points suggested to us that gold was going up.  And I always say people don't know what risk is until you look back 2 years after the decision.  That's what you have to do.  Because you imagine something happening, I think this is going to happen, everything tells me it's going to happen, so I'm ready to go.  But nobody else sees it quite that way at the time otherwise it wouldn't be that cheap.  You only know 2 years later, that it happened, and it produced this great result.  So it always seems risky at the time, but buying gold and gold shares back in 2000/2001 wasn't that risky - they had gone down for 18 years.  So it wasn't risky.
• Not only do we believe in something, but we write about it.  Our clients can read what our views are.  We're quite out there on it.  You can see we're written many articles on gold and tried to explain to people why we are there.
• Uranium.  We bought significant uranium investments in 2003.  Was it risky?  The price of uranium had gone from $7 to $14 already.  We had not yet purchased any uranium stocks but the price had doubled.  And I happen to be a believer that when a price goes up by 20%, something unusual is happening.  For it to go up 100% something incredibly unusual is happening.
• If you want to use the 20% rule, if we would have bought oil when it went from $10 to $12, or copper when it went from $60 to $72, or lead when it went from $32 to $36, we would have made a fortune.  In all those instances something had changed.
• In the case of uranium, one of our analysts had suggested that uranium could have gone as far as $500.  We had very very high expectations of it.  So when we bought the stocks in 2003, we had this anticipation that there's a shortage of uranium and we're all going to do well.  And as it turned out the stocks from top to bottom went up by over 1,000% (though they've given some back recently).
• Let's go to the other side:  Nortel.  On its way up, it probably wasn't called risky.  But the fact it was risky.
• How about Income Trusts?  They for sure were not risky.  They were a wonderful asset class.  You had to have them and everybody had them.  But you know what, turns out there was some risk out there.
• What about ACBP?  Well that wasn't risky either!  That was even short-term money - there's no risk in that stuff.
• Subprime.  Risky, but we've got this new strategy where we packaged them up and it's not risky.  Well you know what?  It was risky.
• And lots of things that people say aren't risky are risky.  Do I think banks are risky?  Yes I think banks are risky.  I know nobody else does but I do.  We'll see when we get together in 5 years.
  
  
• Sprott Asset Management's core strength.
• You can have views on the economy and you can have views on various industry sectors, but you also have to be able to pick stocks.  Probably our greatest ability at Sprott Asset Management is picking individual stocks within an area.  When I think of uranium, yes we owned Cameco early.  It takes time to research all the little guys so we bought Cameco but we knew was going to be boring.  We knew we had to find the 10 or 20 other guys that really were going to be the winners.    And we ultimately found them all.  And they were all winners, humongous winners.  They would have blown Cameco out of the water 3-to-1 for sure.
• We have 8 portfolio managers and 8 analysts.  We have lots of experience in identifying winners.  I think having experience of picking things and investing in things helps you.  It makes you braver if you've done it before.  Cause every time you're going somewhere new, it is new believe it or not, it's not a recurring thing at all.  Nothing is an automatic winner.  You have to be looking at it carefully, you have to gut it out, you have to buying it when nobody else is buying if you want a really outsized winner, and there will be nobody following it and no institutional owners typically so you are kind of on your own.
  
  
• On Volatility.
• We tend to believe in what we believe in, we stay the course.  And if you look at our chart, you see all the times it goes down, and what do we do about it?  Nothing!  We did nothing.  We held our ground because we believed the market was wrong.  And you can get volatility because the market doesn't see it your way.  Just as we had volatility in August - slam everything.  Turn around September it all goes back up again.
  
  
• Questions
• Q:  Well you must have some stocks that haven't work out?
• A:  Yeah we got lots of crap in there that hasn't worked out for us.  But the winners always offset the losers.  Because one of the things we do is we tip-toe in.  And if it works, you just keep going further.  And if doesn't work, you just drop your hot potato, take your loss and move on.
• Q:  Where do you see the price of oil going and what do you see the implications are for the global economy if production does decline?
• A:  That is a great question and it's the most important question.  Can I imagine the price of oil being at $200?  Absolutely.  And it's going to seem cheap at $200 because it's so valuable.  I just think the price keeps going higher.  There's going to be a real fist-fight for energy in this world.  You have a huge part of the world, doesn't have our standards, that produces what we consume (which is a joke), why wouldn't they just consume it themselves?  Why don't they drive around in the big cars and have all the TV sets that they make that ends up in our houses somehow.  Why don't they just keep them?  Then they can have what we have.  And ultimately that's going to happen.  So I think the price is going to go higher.  I don't know what the solution is.  Maybe if it goes high enough something like solar can become a very valuable addition - all these different alternate energies could come along.  It will all take time and it will be a huge cost.  I think to the economies a high oil price will just be devastating.  Because we will all have to pay so much for our energy which goes into everything.  So I think it is a huge fact that we have to watch for going forward.  That it just keeps getting worse.