Legendary speculator Rick Rule tells a story about how he made—and lost—a fortune by having the bad luck of getting started during a roaring bull market. “I mistook luck for brains,” he says. It’s a great cautionary tale, but one few remember when they get lucky on a speculation. And that can be very dangerous.

On the other paw, Doug Casey used to always tell me he’d rather be lucky than smart.

We have to take that with a big grain of salt, however, because Doug is smart. And his “luck” is the result of decades of experience Perhaps most telling of all is that Doug always insists that successful speculators are not just gamblers. A random chance is not a good speculation. A great speculation is one on which the odds are strongly stacked in your favor.

I was reminded of all this by a recent encounter with an investor who’d made a fortune on one stock, but was deeply underwater on the rest of his portfolio. Given the stocks mentioned, it seemed to me to be a case of the great misfortune of getting lucky early in the game. That turned this investor into a reckless gambler, not a disciplined speculator.

I’ve run into many investors like this over the years. They boast about their great skills, mistaking an outlier on the bell curve for pure genius. Then they quietly slink away when the bulk of the bell curve comes back to bury them in a landslide of bad “luck”.

The misfortune of beginner’s luck is obvious and easily mitigated with discipline—but the misfortune of great luck for experienced speculators is more insidious and can destroy fortunes.

The psychology is the same: we mistake good luck for brains.

What makes this more dangerous is that savvy speculators know we weren’t just throwing darts at a list of stocks. We’ve applied brains to our selections—so obviously our great success was due to our brains, right?

Of course not. It’s always a combination of brains and luck—but just how much of it is luck is painful to the ego.

Back in my Casey Research days, I recommended a company called Staccato Resources. The stock was a 10-bagger (1,000% gain) for me, based on a series of drill holes that delivered high-grade gold at the old Lookout Mountain gold mine in Nevada. But then connecting the dots turned out much harder than expected (or dreamed). The company put out a small and lower grade resource estimate than hoped, and the stock tanked. Those who followed the standard procedure of taking profits on the way up were fine, but those who didn’t, or who came to the story late in the game, lost a lot of money. The speculation was a win for me, but not because I picked a great gold discovery—I just got lucky.

It gets even trickier…

A recent big win for me was SilverCrest (SIL.V). I originally picked the stock toward the end of my Casey days. The story management was pitching at the time was that they had a known, but misunderstood bonanza-grade silver vein called William Tell. This was parallel to the Las Chispas vein which had been the source of bonanza-grade production in the past, and is why the project is called Las Chispas. The hope was that William Tell would turn out to be another Las Chispas.

Well, SIL shares are almost a 10-bagger since then. And the company does have a real, large and growing, and very high-grade silver discovery at Las Chispas. But this success has little to do with the William Tell vein. By far most of the silver is in the Area 51 zone of the nearby Babicanora vein. (For more on SilverCrest, please see my recent interview with CEO Eric Fier.)

In this case, brains did contribute. My examination of early drill data made it seem highly probable to me that initial drill results would confirm the William Tell theory. I was right about that, and the stock doubled not long after. And Eric did also say that the bulk of past production had come from the Babicanora vein, which was thicker and more consistent, if a bit lower grade. So the success there today isn’t totally out of the blue.

But none of us knew that Area 51 was there; we just hoped SilverCrest would find something like it—and we got lucky.

Now, this “luck” was achieved by stacking the odds in our favor. Eric and his team had done much the same before, working in similar geology in the same country. I see my SilverCrest win as a good example of disciplined speculation, not a lucky gamble.

The point, however, is that luck still played an important role in this success. I am, after all, a speculator. But if I’m not watchful, mistaking that luck for brains could make me reckless.

Sadly, I have to admit that I’ve made that mistake. It resulted in the two biggest wipeouts of my career.

I’ve learned a lot from these mistakes—and, alas, many more—but the number one lesson is my motto: discipline pays.

That’s why I so often sign off saying…

Caveat emptor,

Lobo Tiggre Signature

Tuesday, September 3, 6:41am, EDT, 2019