Categories: General Market Commentary
Topics: General Market Commentary

Legendary Investor Jeff Phillips on How He's Playing the COVID-19 Panic Cycle & a Couple of His Favorite Junior Resource Companies (Part 1)

On March 19, 2020, I had the opportunity to speak with one of the most successful contrarian investors in the resource space, Jeff Phillips, about the COVID-19 panic, how he has positioned himself, and a few of his favorite junior resource companies. Here's part one of our three-part conversation.

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the President of Global Market Development and one of the most experienced and successful contrarian investors in the resource space, Mr. Jeff Phillips. Jeff, I can't think of a better time to do this interview. First off, how are you doing?

Jeff Phillips: I'm staying safe, Gerardo. It's definitely a changing dynamic daily, but trying to make sure my family stays inside and we ride this thing out.

Gerardo Del Real: Absolutely. You and I met right around 2007 before the previous financial crisis. I recall Janet Yellen saying, “Never again.” And here we are a bit over a decade later in the middle of a panic. It's global in nature. 

Let me start first off – before we talk markets and commodities and your take there and the cycles – let me ask you about the pandemic as it's now been upgraded to. What are your personal thoughts on the pandemic and kind of where things are?

Jeff Phillips: My personal thoughts – I'm not a doctor, Gerardo. Again, my limited biology goes back to high school – I think this is very serious. CNN and CNBC and all these other news medias that tend to make things as however they want to sensationalize it. I think it's very dangerous. I think that following the CDC recommendations and the number of universities are keeping track of what the virus is doing.

But I think it's very serious and I think people need to be careful. Obviously, I'm just repeating what people already know, but washing your hands, limiting your exposure to six feet from other people, trying to stay indoors as much as possible. Again, I think that it's a very serious thing, but I think the media tends to change the serious nature of what people should be doing and turn it into a media bite. Again, I don't know if that helps at all, but again, I'm not a doctor and I would follow places like the CDC and a number of universities that are putting out solid evidence on what you should be doing.

Gerardo Del Real: I think that's fair and I think that's wise advice there. I spoke with Outsider Club founder and friend, Nick Hodge, earlier this week. We try to take an optimistic look at what good may come out of the situation. And he said something that I thought was pretty insightful and timely. He believes, as do I, that we're going to come out of this probably with a much better sense of community and how important that is. 

Do you agree with that? Is there an optimistic take at the end of this once we get through it? Because we will get through this, right?

Jeff Phillips: Absolutely. Again, it's very serious. At 50 years old, I haven't experienced this. But again, we've got through major world wars and lost lots of young men and have gotten through lots of things in the past and we will get through this. There's been pandemics before and I just think you need to take it very seriously if you're older. I have an older friend that called me and unbelievable to me, obviously staying indoors, but he's out of toilet paper.

Gerardo Del Real: I shouldn't laugh but...

Jeff Phillips: It's funny, but it's not funny. I'm taking him toilet paper after this interview. I did not stock up on toilet paper because there is no shortage of toilet paper. It's a demand issue. The supply is there, it's people panicking and mass psychology along with the media tends to have people panic on the wrong things. Again, it's very serious, but hoarding toilet paper, it's creating its own toilet paper problem. Here I am, taking my limited supply of toilet paper, which again, toilet paper is not one of those things I'm extremely worried about. Worse comes to worse, there are other ways to cope with that. But, again, if you're 84 years old and you shouldn't be outside, you don't have any toilet paper. Well that's something different. The mass psychology of people has turned it into a problem when it shouldn't be a problem.

Gerardo Del Real: Well it's good of you to look out for your friend. And I think, again, more and more advice and recommendations for people is we really do have to come together as a community, as a society and help each other through it, regardless of how we feel about where this came from and where it's going. The bottom line is it's here and it's something we have to deal with. Hopefully we can all be neighborly and help each other through it.

Let's pivot a bit, Jeff. You and I met in 2007 roughly. That's when I fell in love with the junior resource space. Had a couple of great years. Thought I was smart because I bought at the bottom during the last panic. Then obviously I had a little bit of humble pie handed to me over the next several years when the next sell-off happened. 

Here we are just barely coming out of a gold and resource bear market that was already absolutely brutal. Gold ran at $1,700 and now it's pulled back and it's right around the $1,500 level where we're at. How do you play a panic cycle like the one we're in? And how serious is this one compared to the last one that we went through in 2008, 2009, 2010?

Jeff Phillips: I think there's similarities but I think they're very different, Gerardo. The financial panic, we had met before that. I was somewhat well-positioned into that. I did have some large natural resource positions, mostly in gold heading into that. But I had sold a lot of things before that, I was anticipating that there were going to be problems, financial problems, the real estate market. I sold out of real estate in '05 and people thought I was crazy because it doubled from there. But four years later a lot of the stuff I sold was selling at 10 cents on the dollar. 

I was in a different position and I actually foresaw that what was going to happen to some degree. That doesn't mean when you and I met, you and I used to talk and those large positions I still had in the resource sector and everything was being sold off.

It was a financial panic basically because of real estate and loose lending standards and everything else. Again, mass psychology played a role in that too.The herd starts moving in a direction, it can be toilet paper next, right? So it's different. But what the similarity is and this too shall pass just like that will pass. And I guess going into this unforeseen, I was positioned in the sense that yes, the gold and silver market, the precious metals market is a tough market, but I have some very large positions in a number of companies and really for the same reason I was in those companies back in '05 and '04, before the other financial panic, I believe that there were structural problems with the financial system.

I believe that very strongly before this, whatever you want to call it, the Wuhan virus has changed things. What worries me is it's different this time. That was a financial panic and what I was expecting anyway at some point here with a record expansion and record credit being printed and blah blah blah, before all this happened. 

So now you've had something that no one could have predicted. Well I shouldn't say no one. There's people like Jim Dines who've been predicting something like this for the last six years in his newsletter, but most people haven't predicted something like this happening. So again, I think that this is going to change the way people interact and hopefully for the better in some ways. For the same reasons I like gold companies being cheap before this, they've gotten really cheap now because, again, everybody's looking for liquidity.

It doesn't matter. You need to make payments or you have margin calls or whatever it is, you sell what's liquid. So gold, just like 2007 and '08, has been sold off here and will continue probably to be sold off for the next... hopefully this subsides by June and we get a handle on it. I think it'll be a rocky six weeks here. But going forward, I think the one similarity, as I see gold doing very well and these quality gold companies really doing well like they did out of the financial crisis in 2007 and '08. It doesn't mean I'd run out tomorrow and buy every gold stock that I had on my list.

I'm looking at those and am, as of today, starting to buy a few things. As I told you, I just wrote a large check for a company I quite like with a Mexico asset that's nearing production and waiting for their permit. Again, I am writing a few checks, but if I was one of your listeners, I'd be looking to getting into some of these quality resource, not exploration, but actually gold in the ground plays and I'm pretty sure you're going to do really well over the next 12 to 18 months.

Gerardo Del Real: So just to be clear, if you don't have the need to raise capital to sell into this junior resource market and you're down 30, 40, 50% on positions, you don't recommend that people sell into this if you don't need to.

Jeff Phillips: Oh no, everybody's different. But yeah, I can tell you I'm down at least 40% in the positions I have since the beginning of the year, maybe 50% in the resource, specifically gold stocks. But I haven't lost anything. I'm just down on paper, Gerardo. So again, in 2007 and '08 I was down similarly to that in a number of natural resource stocks. I continued to buy some of those after things subsided, like I'm going to do now. And most of those things went up 10-fold, 20-fold in the next two years.

In the grand scheme of things being down 50%, I don't even remember that. I just remember how great it was in 2007 and '11. So again, if you have to sell something, you have to sell it to raise capital. I'm not selling anything, absolutely not. I'm actually, as I said, I just sent a wire today to buy something and plan over the next four weeks to be buying some very high quality gold stocks, some I've owned, some I haven't owned. But I think they've gotten so ridiculously cheap that I suspect I'll have a 4- or 5-fold return here in the next 12 months.

Click here for part two and here for part three of our conversation.