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.
