John Wilson, the chief executive at Sprott Asset Management, describes himself as a more cautious investor with a low risk tolerance.
As head of an influential Bay Street investment firm, who once bet his life's savings to start his own company – DDX Capital Partners LP – you'd think John Wilson would be more comfortable with risk. Instead, the chief executive at Sprott Asset Management describes himself as a more cautious investor with a low risk tolerance. It's an investing style developed over a 30-year career that includes jobs as an electrical engineer, technology analyst, managing director at major investment bank and chief investment officer. The Globe recently spoke with Mr. Wilson on where his money goes, and why he believes investing is an emotional business.
What are you invested in?
The vast majority of assets are in my funds. I don't have a personal trading account or own other fund managers. I own real estate, like most people, but not as investment properties. Just to live in and as a vacation property.
What's your strategy in running Sprott's Enhanced Funds?
I can only follow about 30 ideas in my head. That's about 30 stocks. The second part of the strategy is to own big stocks. I believe that when I change my mind – and I'm going to change my mind – I want to be able to get out quickly and painlessly. We own what we call "market insurance," which is effectively index put options, which help mitigate downside if the market turns on us. Over the years, we've become more sophisticated. We put loss limits on each of our individual stocks.
Describe your investing style.
I was a research analyst for eight years and what I learned about myself through that period was how difficult it was for me emotionally to be under water on a call. Later in life, when I owned stocks and they went down, it felt exactly the same way. What I learned about that is that I love this business, and I love investing … but I really don't love being out of the money a lot. I had to find a way to invest emotionally because it would kill me otherwise.
Some people think it's best to keep emotion out of investments. Sounds like you don't agree.
The worst piece of advice you can give people is to tell them not to be emotional about these things, because it's impossible. Why do markets go up and down over long cycles? It's because we all get greedy until we get too carried away and then bad things happen and we all get fearful and things bottom out, then we go back the other way again. The journey is always about fear and greed and emotion because we're human. In the end, there are things we can do to manage our emotions and behaviour. We know there are certain traps people fall into, like chasing a loser all the way down, or hanging on to a loser because it feels so bad to realize a loss – and so good to cut a winner and show everyone how smart you are. It's one thing to say don't be emotional about it, but it's not realistic.
What have been your best one or two investments over the years?
I have a few single ones: One is shorting Motorola in our hedge fund when the Razr was the most popular phone in the world [it peaked around 2005]. Not long after, Apple started to introduce the iPhone. We rode that one all of the way down. NXP Semiconductors has been one of our best ideas. [Alimentation] Couche-Tard has been another good one. They both remain among our top three holdings.
What was your worst investment?
It's a toss-up. Before I started my fund business and I still was an analyst covering technology, I remember thinking, "Well, I made a little money and I should invest outside of things I generally do." Oil had fallen to around $16 (U.S.) a barrel – in the late nineties. I thought it made sense to buy one of these energy stocks. I bought one and three months later the price of oil was $10 a barrel, evaporating two-thirds of my money. That was a great lesson in terms of doing your own work versus listening to somebody else. It felt so bad to me to lose that much money that quickly when I hadn't really done the work. We've made a lot of money over the years on energy, but we do all of our own work.
I also lost money on my RBC private equity fund for managing directors [when I worked for RBC Dominion Securities]. It got written off to zero two years later. That was definitely my worst investment.
Your first job out of engineering school was at Nortel. Do you have an investing story with Nortel?
I left the company [in 1996] before the stock went to the moon, and before it crashed again. When I left, I had a bunch of stocks and options and sold it all. Two or three years later, I was on the sell side of an investment bank and people on the trading desk were calling me an idiot for doing that. In the end I avoided that fate, but I do think it's a tragedy for Canada and the people that worked there.
What advice do you have for other investors?
One of the best pieces of advice anyone ever gave me, and I would ever give anyone else, is to know yourself. Some people want more risk and like that thrill of buying that penny stock and watching it go up tenfold. There's nothing wrong with that. But you run time and again into people who get into situations where they were thinking about one set of outcomes, but not all of the outcomes that they were comfortable with. There is no certain thing in investing. Know yourself and when bad things happen you aren't so emotional because you thought about it beforehand and didn't put yourself in a situation that you couldn't handle. It's a lot more fun when you invest that way.
This interview has been edited and condensed.