Kevin O'Leary's 'Cold, Hard, Truth' on Gold Investing

this is daniela company for kiko news and joining me on the spot today is one of North America's most successful entrepreneurs he's kevin O'Leary chairman of O'Leary funds a 1.5 billion dollar mutual fund company he's the star of CBC's dragons then an ABC Shark Tank and the author of cold hard truth Kevin what am I missing from this resume I'm just having fun trying to scratch out a living that's what I say just a tad busy these they're definitely so Kevin for our viewers out there who are new to to only refunds tell us a little bit about your background and what your company is about you know the genesis of the company was to manage my own wealth I was lucky enough to have a liquidity event a while ago and I sold the learning company to Mattel was a large transaction was about fourteen of us as founders we sold it for 4.2 billion dollars so it was a huge liquidity event for us and I began to look for managers to manage my money and I remembered a story and it really affected me years ago my mother was born in Montreal worked at a company called kiddies togs and she's to come home and tell my brother and I because they pay them every week on Thursday morning she'd always invest a third for paycheck into bail bonds with coupons she'd always say to me boys never spend the principle just the interest and never ever ever ever buy a security that doesn't pay a dividend and you know back in those days stocks paid higher dividends than the bonds so example you know Bell Canada had a 6% yield on its five-year of paper and bonds the stock yielded seven to entice people to take the risk to own an equity and we got lost somewhere between the 50s and the 60s and 70s and we actually thought that it was a good investment to buy a stock that didn't pay a dividend which to me is insane so anyways I I wanted to found a firm on that my mother's basic concept because you know she died a few years ago and I was executive for her state and I looked at the portfolio which she never shared with anybody but 40 years compounded dividends and bonds you know 73% of the markets returns over the last 40 years came from dividends not capital appreciation and she knew that intuitively so that's how we built the foundation of a leery funds we listen to mom we don't own a single security that doesn't pay a dividend I will never buy a stock in my life that doesn't pay a dividend it's not returning cash to me it's a speculation and if a manager can't send me cash I'm not interested right well you mentioned that often in your book come in what's up what's the typical investor like a holding refunds you know they're probably in their 50 60 70s and even older their number one mandate to their own investment strategy is preservation of wealth secondly its income and lastly on the hit parade is capital appreciation the only way we get capital appreciation is we find companies that are growing free cash flow I don't believe in earnings that's mumbo-jumbo to me I believe in free cash after capex you tell me how much free cash flow you're making every quarter it's the only thing I care about I don't want to hear anything else because if you're not you can't lie about cash that's what I love about cash there's no vision there's no story there's just cash and that's what I trust and that's what I understand so I find companies are growing cash I buy their debt that perhaps their converts their common shares because they pay a dividend and I wait in the weeds I get paid every single quarter anything it doesn't pay me cash not interested what areas of the world do you like right now where you're investing you know I look at it very simplistically I say where's the GDP growth because that's the rising tide for any operation a telco a toll road a consumer goods company you'd rather own that in a country that has GDP growth north of three percent so right now you know I used to be 70% invested in Canada I'm down to less than 25% here because we're not growing we're not growing in the US I like Brazil India China Asia Cambodia Thailand they got it cooking over there they're growing so I'd rather own the Brazilian telco than any Canadian telco I mean you look at the the worst returns in telco or in Canada you can buy a Brazilian telco that's been a phenomenal investment in the last five years and the great thing about these companies overseas is they're so big now so huge they're issuing the Securities and US dollars and I can hedge that back to the Canadian dollar for next to nothing so you mentioned China are liking the base metals right now like copper I do but here's the problem with owning the base metals in my way of looking at the world with the exception of gold which I own a 5% weighting of my net worth in four reasons we'll talk about later I'd rather own a service provider that mines copper or provides utilities to the copper mine that pays me a dividend I'd rather rather on a pipeline than the oil that flows in it because commodities have this nasty habit of being very volatile they don't pay you to wait where is my cash where is my check every month I don't want to speculate on what copper is going to be worth next week I'd rather own a company that's providing high-pressure trucks to copper mines that sends me a five and a half percent dividend and I do own that company I get paid every single quarter cash cash cash cash cash that makes me feel warm and fuzzy okay so what do you think of about the gold mining stocks right now and why maybe they're not performing in tandem with the price of gold idiot management the problem is the management of gold companies can't control their costs I interview every gold CEO they come into the CBC or they come on the Langley ryx James I asked the same question all of them look give me one reason I should own your stock and not the gold you mine because I show him his chart I show them the price of gold and they are ugly you'd rather own gold never own the miner own the gold in physical gold yeah I am well here's what I do I own physical gold for 50% of the positions of two and a half percent waiting and I use the GL DS which are an American US pay or US currency you know product and and then I you know supposedly on the physical go that way but what I like about the GLD is I can trim my waiting every month so when it gets over five percent waited I ping off a few GL DS or I buy in the GLD it's physical gold I go hug at night it I think the thesis that many people are bringing to me now is why not switch out of gold and the Geo DS and by the miners they've had the living and you know what pounded out of them they're at the lowest valuations visa vie the commodity itself and I say they're going to go lower Wow I really do because there is no reason to own every if you look at almost everyone except the royalty ones their costs keep going up in every case I say they're mismanaged I say if a manager can't control its cost fire them get somebody else who can because if your cost of mining the actual ounce keeps going up why would I ever buy the stock what give me one reason there's no mining Co you like right now I love them all I just would never buy their stocks either great people right but you tell me one reason I should own the comment give me one reason dividends are practically nil across the sector you have huge operational risks you've got idiot management in the juniors not that they're bad people I'm just saying the cold hard truth about investing if you want exposure to gold buy the gold forget the miners but do you think part of the problem is there's too many juniors on the scene from oh it's just a wasteland it's carnage out there we had the pea tech conference here they were rolling in like ants into the CBC to get interviewed I talked to all them till the story got to be the same like it's the same start all woe is me I can't raise any dough my costs have gone too high the mine is delayed six months we're not in operations after a while it's just the same drone it's boring and I'm thinking to myself these poor guys their life must be hell you know the definition of your bad person on earth is you go to hell and you run a gold mine okay Kevin tell me why do you like gold I like gold because in a way it's a stabilizer it's an insurance policy you know I listen to all the gold pundits and they're always wrong as far as I'm concerned it's possible to time the moves I've owned gold for decades and I simply have a 5% waiting I look at it quarterly when it becomes more than 5% I sell into the strength and when it weakens I buy into the weakness it's just a stabilizer you know I'm not one of those guys that's going to go to 40% winning in gold I don't believe the hyperinflation story it hasn't happened gold is popular for a whole host of reasons and 5% seems to be enough it's worked for me in portfolio management it's the only security I own that doesn't pay adieu so Kevin I guess do you not care if gold goes to two thousand or five dollars announcer still going to buy gold yeah I don't care like let it let it run I'll be selling into that strength he going to 5% waiting you know what I've learned I'm an old crusty investor when everybody's saying you got to own it you should be selling it because when it corrects it doesn't touch the sides on the way down so I simply say 5% is good for me some people like it 10 15 % waiting I'm a 5% guy and I'm disciplined about it I hope it runs to 5,000 I don't care I'll be selling selling selling selling and selling all the way up keeping it 5% and when it corrects back down in 2000 will be buying it in it's fun that's the way you should work with goals never get so caught up that you take all your dividend yielding securities that are also a hedge against inflation and put it into a commodity like gold what do you think of people who say we should go back to a gold standard that's unnecessary we're in a global economy now you know you think about what's happened with currencies here's my strategy with that I simply say look if I'm domiciled in the country where I pay taxes which for me right now is Canada I have 50 percent of my cash in Canadian dollars then I diversified through every other currency I own US dollars I've got a twenty percent waiting there I own Swiss francs I own euros I don't need the Aussie dollar because it's too correlated to the Canadian and I sit and wait you know people are trying to tell me let's FX here let's FX there nobody can make money in FX trading you blow up when you try and do that so just own a basket of currencies and then you know you don't know who's going to raise rates first and what the deltas are going to be but you're protected that way speaking of currencies do you think we'll see a shift in a global reserve currency one day I think in my lifetime which I hope is a lot of years left we will see the Chinese wanted over I I just look at my investments in that country they're volatile but the performance and the growth metrics are fantastic I can sense the cash moving out of North America old and fat and slow growth where the Romans now and then I look at where I'm making all my money it's all happening in Brazil India China so scale the Chinese economy is going to overtake North America during my lifetime a lot of people are alluding to the snowcone yeah yeah look there's nothing look when you have tax policy and confusion and I think you know the American economy was burdened by being the policemen of the world they've just figured out that doesn't work but there are trillions of dollars in debt I don't think you can see the Americans jump into the next war anytime soon it's just too expensive that whole experience in the last seven years has been horrible we as Canadians should also look at that example and say let's take care of our own cooking here let's make sure that we pay down our debt the most mismanaged province in Canada right now is Ontario this governments in chaos it doesn't know what it's doing it's getting them back oh I mean it's on its way to being to Quebec I mean the taxation here was on its way to being competitive you want a twenty five percent tax rate and the government here is stalled the declines in the provincial taxes they've raised a super tax on the rich which never works by the way never they're going to have less tax revenue than they started they're so dumb that way that's a huge mistake you think the rich are stupid they're just going to defer their income or take it right out of the province they'll leave it's a very bad strategy the British tried it and they lost revenues and we raised it to 50% now they're dropping it down again so let's look at the u.s. a second you think that we'll see more money printing there will we see a QE 3 perhaps I think in a way QE 3 will happen because I look at some just fundamental issues that what we needed to see was 400,000 jobs a month we're nowhere near there were at least 33% less than that that's just a break-even stop unemployment but it's the housing that has been nervous it refuses to come back and you just looked at last week's price Shiller numbers and they're down even in considerings like Boston you know Miami's recovering a little bit but the major centers are still anemic and that's a problem because until Americans feel that the core asset their home has stabilized they're not going to have the animal spirits and they're going to continue to have less behind power so it's a problem I'm not calling for collapse of the US markets in fact they're doing very well because the SP is 52% of its sales outside of North America but the core underlying growth of America is going to be sub 3% for a couple of years and maybe longer alright come on let's just get back to your book accession you say you really know whether you're born to be an entrepreneur or an employee right so how did you know you know I tried working for somebody when it's very young and they fired me in ice cream right and it was a very very profoundly affected me profoundly and I just said I'm never working for anybody again it doesn't mean your life is easier in fact you give up you have to have a lot of sacrifices in on the road to success and a lot of failures along the way I just find it a more interesting way to spend your time and I really believe in this concept of money buys freedom and so you know I think it's a very noble pursuit for some percentage of the people out there but not for everybody because you have to sacrifice a lot for the period that you're working on your business and not everybody wants to do that and I think you find that in your own you start down that path and if it's too much of a sacrifice you revert back to being an employee which it's very noble to do that to but it's not the same thing it takes a long time to set yourself free working for somebody else in your book you also say when you're investing you should have an element of fear in there you should make the assumption when you make an investment there's some probability you'll lose it it'll go to zero and that's why you need to have you know a reserve like a back-up plan some cash set aside that if everything blows up you're okay I find it extraordinary when people make their first you know liquidity event and they have some capital that they blow it all again that is the biggest mistake you've got to take a nut even if it stays in cash or it's a very very liquid safe security to say that I don't touch it goes back to what my mother taught me spend the interest never the principal I mean look you know I make a lot of crazy investments I don't touch the principal what investments are you liking today I'm liking very simple deals where I can understand the business model give you an example how boring and simple and how successful it can be this is from shark tank you know I do I look at a lot of deals on shark tank and on Dragons Den because I invest five percent of my net worth every year in venture deals so I used to have to go find them now they come to me I've got two platforms to work on this is a shark tank deal so Oprah as a hairdresser interesting guy he's uh his hobby was tea this tea you drink and he became what's called a nose he had a certain skill to be able to smell salon teez blend them one day he gives couple years ago a cup of tea to oprah well he's doing her hair and she sips it and says his best he I've ever had she goes on the show half an hour later and says this tea called Talbott teas is the best tea I've ever had he gets orders the next day for five hundred thousand dollars you know the Oprah effect you've heard of it right he can't finance that so he comes on Shark Tank and he's looking for $250,000 and I agreed to buy 35% of the company for that I love tea it's so simple gets on Oprah 500,000 orders and even Marcus all kinds of individuals ordering on the Internet simple tea orders cash flow right while we're in the middle of doing the deal the show airs and Jemma juice a public company says we want to be in the tea business we love this story we love the brand I want to buy the company I haven't even written a check yet and bang the deals done Wow yes Wow that's the kind of deal I like because it was simple it's not a complicated text story it's tea tea with a brand now you go into a Jamba Juice anywhere in North America that's my Talbott teas that's right isn't that wonderful is wonderful that's why you are well that's why I am is but you know I look at it this way the simple deals are the ones you make money on so I take that cash back Irie deploy it so I like simple stories with revenue attached to them you know the high tech stuff I came out of that market it's so complicated so much can go wrong so I just love deals where they see an easy path to revenue all right Kevin finally if you have some final thoughts for investors watching out there diversification is the only free lunch and investing and I see this happen so many times here's my basic lesson that I've learned that I never very from and this works trust me it works never more than 5% of your portfolio in any one name no matter how great the story is if it's the next nor tell if it's the next rim who cares five percent max waiting for me usually it's two and a half to three percent I never let a stock get bigger than that in my portfolio I sell into the strengths all the time secondly never ever ever more than 20% any one sector so if you love gold you just can't get past 20% of your net worth in gold or energy or any other sector or financial services so good sectoral diversification is crucial and finally for me I'm over 60% weighted in debt now versus equity not government debt not treasury bonds but corporate debt remember that a BB or triple B bond is serviced before they pay the dividend on a common stock so I like to own write up the balance sheet so I own a lot of preface converts senior debt floating rate notes I love that stuff because when they get upgraded I get capital appreciation meanwhile I get a check the key to life is the check coming in it's the cash if you always always always look at the free cash flow this will keep you safe because the only friend you're going to have when you're old and crusty is not your dog not your kids it's the cash in the bank that's still going to love you Kevin thank you so much no problem and thank you for watching this edition of on the spot you can email me as always at news feed back at Cape Cove you

Channel: Kevin O'Leary

Views: 869,679

Rating: 4.7534165 out of 5

Keywords: Gold, Kevin O'Leary, Interview, Investing, Cold Hard Truth

Id: aZ0T6RwJYPc

Length: 19min 12sec (1152 seconds)

Published: Thu May 10 2012