A bull in bear's clothing

Toronto Globe and Mail published a wonderful profile of Canadian fund manager and GATA supporter Eric Sprott. The profile mentions the gold-price suppression scheme, and of course Sprott Asset Management was publisher of the groundbreaking study of the manipulation of the gold market, "Not Free, Not Fair."


A bull in bear's clothing
What gives Eric Sprott the vision to see opportunity in every discouraging trend? (Hint: It's a product you, too, consume)

BOYD ERMAN
From Friday's Globe and Mail
April 27, 2007 at 6:08 AM EDT

Observe the crowd when Eric Sprott heads to the front of a room full of financial types and launches into his routine: Eyes roll, heads shake and hushed voices trade asides.

It's hardly the reception you'd expect for one of the most successful investors in the country. But it's not difficult to fathom why Sprott makes audiences uncomfortable. People whose livelihoods depend on the financial markets don't want to hear yet again that the world is running out of oil, that the price of gold is headed for the moon, that the world's currencies are doomed to devaluation and the global financial system is on the brink of collapse. And they especially don't want to hear it from someone who is right so often—a guy who called the end of the technology bubble and the plunge in the U.S. housing market well ahead of time.

In a world fuelled by optimism, Eric Sprott is a big downer—unless you're one of the investors who has enjoyed the stellar returns in the $4.8 billion worth of hedge and mutual funds he and his team run at Sprott Asset Management.

The firm's predictions, chronicled in a monthly newsletter that Sprott co-authors, conjure up a Mad Max future where people fight over the last drops of gasoline. "We're relying on the price of oil going up," he says. "We're relying on the price of gold going up, the meltdown of the financial system." Sprott is so consistently nervous about a stock-market free fall that for the past seven years he's been telling investors to stay away from his firm's equity mutual fund, because, unlike his hedge funds, it can't resort to short-selling to protect against a plunge.

Yet people who know Sprott attribute much of his success to—get this—his sunny outlook.

"He's an incredibly optimistic person," says Scott Lamacraft, who has known Sprott since he did a summer-student stint at Sprott Securities in 1993. "That's what differentiates the great people in business from the not so great. For Eric, the glass is half full. You can be bearish and optimistic at the same time. You can see opportunities where other people don't."

Sprott has been so good at finding those opportunities that his equity fund—the very one he cautions against buying—has averaged annual returns of about 35% since 2000, according to Globefund. Facts like this feed the legend: Sprott is a man who can make money in any market.

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Sprott, a tall, broad-shouldered 62-year-old, has prospered on both sides of the securities business—brokerage and fund management. Raised in Ottawa, he graduated with a commerce degree from Carleton University in 1965 and headed straight into the investment world as an analyst at Merrill Lynch.

In 1981, he founded his own brokerage firm, Sprott Securities Inc., which he turned into one of the most successful boutique investment dealers in the country. It was known for its focus on research: Fascinated with finding small companies with big potential, Sprott spent long days getting to know businesses and pitching the resulting ideas to fund managers.

But as the end of his second decade at the head of a brokerage approached, Sprott grew frustrated with the routine of coming up with investment ideas for others. Already running the Sprott Canadian Equity Fund, he itched to spend all his time investing. He sold Sprott Securities to his employees and founded Sprott Asset Management Inc. He has no regrets—he's better off for the change, both intellectually and financially. Sprott's secret? He reads—voraciously. He rises every morning by 5 a.m. to plow through three newspapers—The Globe and Mail, National Post and The Wall Street Journal, before getting into all the research that accumulates on his desk each day. Other people may run their funds with computer modelling and game theory; Sprott attaches clippings to his missives for investors. "I'm always shocked that you can read things in the newspaper that prove to be incredibly valuable, that a lot of people miss," he says.

For much of the 1990s, Sprott was a bull, and he didn't shy away from technology investments. One of his top picks in 1998 was Teklogix International Inc., a maker of wireless gear. It soared more than 400% that year. But as the decade drew to a close, the dizzying heights of the stock market were starting to concern him. In the summer of 2000, he happened across a story in The Wall Street Journal that made him certain that the bubble had to pop.

The article described an analyst who was concerned that some upstart phone companies, known as competitive local exchange carriers (CLECs), wouldn't be able to pay the interest on their bonds. "I thought, 'My God, if she's worried about the bonds of the CLECs, what the hell does that say about Nortel, which sells to the CLECs?'" Sprott says. "How are they going to pay their invoices? That was way before Nortel peaked out. There it was in The Wall Street Journal. We took it as gospel and realized that Nortel was going to have a lot of difficulty."

At the time of that epiphany, Sprott was already touting investments in gold, metals and energy as a safe haven. He went a step further in the fall of 2000, launching his first hedge fund so he could sell stocks short to protect investors in a market meltdown. Since then, Sprott has generated a compound annual return of 30% in that first hedge fund, and gone on to start two more.

There's more to the reading than just logging the time, of course. Sprott has trained himself to seek viewpoints from the edge. The "recommended reading" list on Sprott Asset Management's website is full of apocalyptic titles such as Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression and The Party's Over: Oil, War and the Fate of Industrial Societies. "You learn to be at the extremes, because at the extremes is where something is going to happen," says Sprott. "If you read the mainstream, you're not going to learn anything."

His employees get the message. "The first thing Eric taught me is to challenge the consensus," says Lamacraft, who now runs Sprott Securities, recently renamed Cormark Securities Inc. "Don't just believe what you read on the surface, but get one level deeper and see what's really going on."

Reading the viewpoints emanating from Sprott Asset Management, one could easily imagine that the firm is located not on Bay Street but in an underground bunker staffed by equal complements of conspiracy theorists and survivalists. There are suggestions from time to time that central banks are manipulating the gold market to depress prices; Sprott himself is a believer in the peak-oil theory.

"The peak-oil thesis says that if we've hit the peak, then production goes down forever," Sprott says, his tone darkening. "That's a big statement if it's true. Forever. Oh my God, can you imagine a world where we're trying to survive 10 years from now on 60 million barrels, or 15 or 20 years from now on 60 million barrels? It would be such a fight over who is going to get the oil. Because we have to have it. So it could be quite wild."

Then he brightens, saying, "But maybe we'll find solutions." Indeed, Sprott has placed big bets on some of those potential solutions. His firm is one of the largest investors in uranium companies, and has also piled into coal producers. Ethanol he's not so sure about, given that it takes a lot of energy to produce. So far, uranium has paid off spectacularly; coal hasn't. Maybe coal will climb when the supply of oil gets really tight, Sprott figures. In the meantime, he's not about to buy more, citing one of his maxims: Don't push a loser.

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For a wealthy man, Sprott has a regular-guy persona. He tends to order Coors Light even at Toronto's priciest boîtes, and on a casual Friday you'll find him in chinos and a Tommy Hilfiger shirt, rather than in the Italian threads that many of his counterparts in the industry sport.

His big indulgences are philanthropy and collecting art. In total, he has donated more than $20 million to his alma mater and an Ottawa hospital. Although he says he's not the least bit artistic and never dreamed of becoming a collector—he goes all aw-shucks when discussing art—Sprott's office looks more like the National Gallery than a fund firm.

His is one of the finest private collections of Canadian art: Inuit sculptures adorn the lobby, and the walls are hung with paintings by Emily Carr, the Group of Seven, Jean-Paul Riopelle and Norval Morrisseau. Lately, Sprott has been branching out into impressionists. A van Gogh, no less, hangs just inside the front door.

The strange thing is, this big-time collector is colour-blind. "It's not the colour that does it for me," he says. "It's probably the contrast in the colours."

Art, philanthropy—enough to keep a man satisfied, no? Sprott does periodically think about slowing down. "I've had a good run," he says. "I don't need to start something else." Then he laughs, realizing that he is starting something else—a company that will invest in molybdenum, an obscure metal used to toughen alloy steels. Investors, lured by Sprott's reputation, anted up $200 million for units in Sprott Molybdenum Participation Corp. in April—twice as much as the firm expected.

"In one way, you wonder why you do it," Sprott says, turning reflective. "But we believe in it. I think it's going to be a good thing for people to invest in, so fine. Let's go do it."