The Late Dick Russell

(1924 to 2015)

Rich Man, Poor Man

In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur and the neophyte trader.  The advantage that the wealthy investor enjoys is that HE DOESN'T NEED THE MARKETS.  I can't begin to tell you what a difference that makes, both in one's mental attitude and in the way one actually handles one's money.

The wealthy investor doesn't need the markets, because he already has all the income he needs.  He has money coming in via bonds, T-bills, money market funds, stocks and real estate.  In other words, the wealthy investor never feels pressured to "make money" in the market.

The wealthy investor is an expert on values.  When bonds are cheap and bond yields are irresistibly high, he buys bonds.  When stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the "give away" table, he buys art or diamonds or gold.

In other words, the wealthy investor puts his money where the great values are. And if no outstanding values are available; the wealthy investor waits.  He can afford to wait. He has money coming in daily, weekly, monthly.  The wealthy investor knows what he is looking for, and he doesn't mind waiting months or even years for his next investment (they call that patience).

What about the little guy?  This fellow always feels pressured to "make money." And in return he's always pressuring the market to "do something" for him.  But sadly, the market isn't interested.

When the little guy isn't buying stocks offering 1% or 2% yields, he's off to Las Vegas or Atlantic City trying to beat the house at roulette.  Or he's spending 20 bucks a week on lottery tickets, or he's "investing" in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).

And because the little guy is trying to force the market to do something for him, he's a guaranteed loser.  The little guy doesn't understand values so he constantly overpays.  He doesn't comprehend the power of compounding; he doesn't understand money.  He's never heard the adage, "He who understands interest -- earns it.  He who doesn't understand interest – pays it." The little guy is the typical American, and he's deeply in debt.

The little guy is in hock up to his ears. As a result, he's always sweating.  Sweating to make payments on his house, refrigerator, car or lawn mower he's impatient, and he feels perpetually put upon.  He tells himself that he has to make money -- fast. And he dreams of those "big, juicy mega-bucks." In the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes.  In short, this "money-nerd" spends his life dashing up the financial down-escalator.

But here's the ironic part of it.  If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he'd have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser. Because the little guy is trying to force the market to do something for him, he's a guaranteed loser."

Rule 1: COMPOUNDING...

Rule 2: DON'T LOSE MONEY:

This may sound naïve, but believe me it isn't.  If you want to be wealthy, you must not lose money, or I should say must not lose BIG money.  Absurd rule, silly rule?  Maybe, but MOST PEOPLE LOSE MONEY in disastrous investments, gambling, rotten business deals, greed, poor timing. Yes, after almost five decades of investing and talking to investors, I can tell you that most people definitely DO lose money, lose big time -- in the stock market, in options and futures, in real estate, in bad loans, in mindless gambling, and in their own business.

RULE 3: VALUES: The only time the average investor should stray outside the basic compounding system is when a given market offers outstanding value.  I judge an investment to be a great value when it offers (a) safety; (b) an attractive return; and (c) a good chance of appreciating in price.  At all other times, the compounding route is safer and probably a lot more profitable, at least in the long run."

-Richard Russell

DYI:  I attempted without luck to find when Richard Russell wrote these two observational letters, however I remember reading them on the internet during the mid 1990's.  My best guess they were written back in the 1980's and despite being at least 40 plus years old they are just as relevant today as they were back then.

What does Dick Russell mean by compounding?  

Short term bond funds, money market funds, CD's at the bank, Series E or I Savings Bonds, buying 2 or 5 year U.S. Treasury notes etc.  In other words buying save and very boring interest bearing investment assets building a nest egg waiting patiently for the next on-the-give-away table investment.