Even with a cyclical upturn, juniors will face challenges, says John Kaiser
by Greg Klein
With over 30 years’ experience as a researcher, analyst, investment adviser, newsletter writer and creator of Kaiser Research Online, John Kaiser commands a looming presence over the junior resource sector. At times brash and outspoken, he nevertheless comes across as someone very concerned about the sector’s health. Following a December 9 speech to the Association for Mineral Exploration British Columbia, Kaiser took time to speak with ResourceClips.com. This is Part I of a two-part interview. Read Part II here.
On accredited investors
Private placements, “the overwhelming mechanism by which companies raise money,” exclude most potential investors, Kaiser points out. The largest category allowed to participate is the accredited investor. With a net worth of $1 million excluding the value of a primary residence, or a single person making at least $200,000 annually for the past two years, or a couple jointly making at least $300,000, the category constitutes “a fairly small group, especially when restricted to Canada.” Institutions qualify too, but they’re interested mostly in major discoveries or advanced projects, Kaiser says.
“One of the paradoxes is that a tiny minority is allowed to put money into corporate treasuries based on an assumption of merit, knowledge and sophistication that nevertheless includes somebody who inherited money, who won a lottery, who’s a criminal, who’s a simpleton but makes 200 grand a year.”
“Insofar as it’s supposed to protect individuals, there’s nothing that restricts the non-accredited retail investor from opening a Charles Schwab account, putting his life savings in it and blowing his money. So to be consistent, they should ban non-accredited investors completely or re-think their accredited investor restrictions.”
He considers the point vital to the sector’s viability. “Everybody in the industry needs to talk to the regulators, talk to the stock exchanges, talk to the politicians. Ask them, ‘Why is it that a shrinking minority are the only ones allowed to make these investments? And why aren’t you changing this when the broker is no longer playing any meaningful role guiding investors?’”
“There’s no measurable, intrinsic value to an exploration junior,” Kaiser says. “A junior’s value exists in the minds of investors, although advanced projects are supported to some degree by economic studies.”
“So over the last three years, when companies have published something that resembles good news and buying comes in, there is selling, both from existing shareholders and this new breed of shortsellers who basically snuff out the uptrend. Because they can continue selling on a downtick, they eventually turn momentum into negative momentum. This has undermined the market’s role as a price discovery mechanism and it’s become a particular problem for junior explorers.”
On the decline of brokers
Along with the internet, deregulation has undermined brokers, who “no longer serve as a network hub of information,” Kaiser says. “In the ’80s and early ’90s, the broker played a useful role in gathering information from street sources and getting it back to their clients. After deregulation, people would pump the broker for information but go on to trade with their discount accounts.”
Everybody in the industry needs to talk to the regulators, talk to the stock exchanges, talk to the politicians. Ask them, ‘Why is it that a shrinking minority are the only ones allowed to make these investments? And why aren’t you changing this when the broker is no longer playing any meaningful role guiding investors?’—John Kaiser
Further hindering the broker’s job was a regulated client relationship model that rendered high-risk investments unsuitable for an aging demographic. “This has created a problem in that the people who do have money tend to be older. Most high-risk investments become unsuitable. So situations have emerged where the broker refuses an order from the client because if the investment doesn’t work out, the litigation system that’s emerged can argue that the broker allowed an unsuitable transaction to take place. So the regulators are foisting upon the broker some sort of nanny responsibility.”
If the decline of brokers isn’t bad enough, there’s the trend towards robo-advising, Kaiser argues. It’s evident in some American “upstarts” as well as established discount houses like Charles Schwab, he says. On signing a new client and completing a risk-tolerance profile, they provide pre-vetted products that fit each of the risk categories, monitor the account and, when an investment performs unusually well, they sell it and redistribute the money. “This is a huge threat to the financial sector because it basically means we don’t need those human beings anymore.”
“The banks are kind of behind this because that organization FAIR [Canadian Foundation for Investor Rights] has adopted this refrain,” Kaiser says. “They like robo-advising. IIROC has actually donated money to FAIR to pump this thing and the financial sector wants to get rid of human beings ultimately. So there’s not going to be human beings interfacing between people’s money and these big financial entities.”