Once bitten, twice worth a try
9 March 2010
Sean Russo
WHY is it okay to remarry (several times) after a shocking experience(s) but one bad hedging experience, it seems, is enough to have people swear off it for life?
While I was at Indaba I was introduced to the CEO of a very successful Canadian gold producer. I had never met him but I knew him by reputation and I knew he had a very strong and negative view on hedging based on a very bad experience some years before where he had hedging attached to debt that had ended up being substantially out of the money. To spice things up a bit I introduced myself and then said: “Your name is very familiar to me. Oh yes, I remember, they were talking about you at dinner last night and someone said that the gold price was now high enough that even you were strongly considering hedging again”. He grabbed the bait and ran hard. Hedging – not me, he said, hedging is the only thing that cost me more than divorcing my first wife!
I’m usually pretty quick on the uptake but I missed my chance as he had moved on before it dawned on me he had said “my first wife” and not “my ex-wife”. That language implies to me he has remarried at least once more prior to that painful and expensive divorce. Why would someone so scarred by the cost of a marriage break up, dive right back into that pool but not be willing to have another go at hedging? Surely in both cases the key lesson is not to repeat the mistakes of the previous experience. I could suggest that it might be because of the different decision centres involved in those thought processes, but that might be a little below the belt.
I got married pretty quickly after divorcing my then-wife (my first marriage was measured in hours) and I remember my father questioning not my choice but the timing. I said dad, last time I thought I knew what I was looking for in a wife but I was wrong. What I now know is that I have a very clear idea of what I don’t want in a wife and what I did wrong as a first time husband. I accept marriage is difficult and it won’t always be easy but I am better for the previous experience and as a consequence of that experience I know I have made a much better choice this time. Twenty years on still married to my now-wife with three happy, well-adjusted kids I am very pleased I didn’t let my first experience turn me off marriage.
I am looking forward to meeting my new acquaintance at PDAC in Toronto and actually following this line of questioning.
Perhaps he will tell me he got a pre-nuptial signed the next time. Rather like getting a decent internal hedging policy in place that is based on protecting your worst case outcomes not trying to predict gold price highs and lows, I intend to answer.
Then I expect he will recount the pain of the margin calls he was forced to meet. I have some sympathy here as that is a soul-destroying process but the fact is no producer should ever put themselves in a position to have to pay margin and no bank worth their salt should ever expect a producer to be in that position. So I will counter along the lines that choosing your bank is rather like choosing a wife; and, a wife that wants margin is simply too high maintenance no matter what the fringe benefits might be.
Clients of Noah’s Rule will be very familiar with the last analogy because we always tell them to think about the choice of banker/hedge provider as being like a marriage because the only time you will really know if you have made the right choice is when things between you aren’t going well. Telling your banker you can’t pay interest is a bit like telling your third wife you had to cut her shoe allowance, and telling them a principal payment is in doubt a sure fire way to ensure the high-profile/high-expense entertainment (the closest thing to sex between borrower and lender) is being cut off immediately.
We also always say that the bad habits or idiosyncrasies of any partner were never solved, or even improved, simply by marrying them so they must also think about the loan documentation like it’s a pre-nuptial agreement. Something you hope you never read twice, but something you hope you read well and understood the first time. It’s something that can’t be vague and if there were big promises up front to woo you to that bank, the commitment on the delivery of their promises to you must be as strongly documented as your obligations to them. Marriage is a two-way street.
So why is it that this bad hedging pain is felt so differently?
Do we envy the unhedged producer in a rising market like we envy our mates that never married, despite the statistics that clearly suggest single people don’t get more sex than married guys?
Is it that divorces tend to be private but hedging mistakes are so public? Not sure that’s right because divorce costs the individual far more personally and my new acquaintance’s company survived and went on to prosper.
Perhaps it’s because there is a third party in this marriage – The Mistress. In this case gold is that mistress, but it can just as easily be copper or nickel or whatever. Usually it’s the married guy who keeps the mistress by promising her his wife doesn’t understand him like she does and he will leave his wife and marry her just as soon as he gets a few things sorted out. Whether or not he’s really in control he thinks he’s in control.
In this case it’s the golden mistress that’s in control. She teases, she’s volatile, but she keeps on delivering, making the miner feel good, like he’s got it all or he will have if he can only hold it together. She tells the miner he doesn’t have to leave the wife because she likes it just the way it is. Close friends (brokers, investment bankers) tell him how lucky he is and encourage the relationship, living vicariously through him, while not taking the same risks he is.
Trouble is more than one mistress has turned into a hysterical stalker. Gold was a cruel bunny boiling mistress in the late 1990s, when she led many to hedge far too much to save their jobs/marriages at almost any cost. At present she promises a great deal and the future looks bright. Maybe it is different this time. You could have your cake and eat it too when gold was your mistress in the Noughties. Will it still be right in this decade?
The current fear of public humiliation by locking in sensible prices on sensible volumes and creating a safety net should prices turn south and having them go higher instead is irrational. Stating publicly you are now, and forever will be, a non-hedger is equally irrational. Look at what happened from 1978-84, the liaison with the golden mistress was brief and exciting but it was followed with a long run in the doghouse. What’s wrong with reserving the right to modify strategy as external circumstances change, as you know they will?
People marry for all sorts of reasons: love, safety, status, the desire to have kids. People remarry and people marry people who have been married several times before even though they have terrible form. The thing is that most people have concluded it’s a good thing that some people do poorly or for the wrong reasons but it doesn’t turn them off it.
Someone once told my daughter don’t marry for money but try to find love where money is. Probably good advice. Sounds to me rather like buying shares in a gold miner with heaps of in-ground inventory and a sensible hedge book.
Whatever life throws at you, it’s all good.