Richard Russell (1924-2015), probably the most respected of financial writers, is most well-known for his Dow Theory Letters newsletter. His most popular piece was entitled “Rich Man, Poor Man.” He remarked,
Making money entails a lot more than predicting which way the stock or bond markets are heading or trying to figure which stock or fund will double over the next few years. For the great majority of investors, making money requires a plan, self-discipline and desire.
The letter contained four points, or “rules”, on which I will attempt to expound below:
Rule 1: Compounding
Russell basically uses the same story that I used in my blog “Tale of Two Brothers” to illustrate the miracle of compounding. The story is as follows:
Twin brothers, who had not seen each other since graduating from high school, happen to meet on a beach in Hawaii on their 65th birthday.
Brother #1: “I have always felt so guilty. You became an auto mechanic, whereas I became a lawyer. I went to Harvard Law School and started putting $5,000 into an IRA at age 28. I now have over $1,000,000.”
Brother #2: “No worries. I started my IRA at age 18 and stopped contributing when I was 27. I too have over $1,000,000 and I live here.
Of course the story has problems (one cannot earn a constant 8.00% on their money as in the story nor ignore the effects of inflation), but does illustrate that slow and steady is usually the best course.
Rule 2: don’t lose money
Famed investor Warren Buffett is reported to have remarked, “The first rule of making money is, ‘Don’t lose money.’” The second rule is, “Do not forget the first rule.”
As the following chart shows it can take a substantial return to make up a loss. For instance, if the market was down 35%, it would have to go up 54% to get back to even. Substantial losses make it tough to compound returns.
Rule 3: rich man, poor man
Russell writes of the importance of patience. The rich, he says, do not need to make money. They can afford to wait for the best opportunities. One of the most powerful investing temptations is fomo-the fear of missing out. This temptation, this fear, is one of the driving forces of market bubbles (such as this market?)
Similarly, one pundit writes, “There is a sense of desperation underlying the way in which we’re investing.” He theorizes that the average Joe’s anxiety of funding a certain lifestyle requires a minimum investment return. He must roll the dice-he cannot afford to wait for a better opportunity.
Rule 4: values
“Values” refers to the worth of an investment. The Chicago School of Business is famous for turning out economists who are adamant that “there is no free lunch.” The joke is that if they saw a $20 bill lying on the sidewalk they would not stop to pick it up-for there is no free lunch. My suggestion if you see a $20 bill, pick it up!
As Richard Russell wrote, “…making money requires a plan, self-discipline and desire.” To know where you want to go, the desire to get there and the tools to achieve success can be critical. We have the training and knowledge to help you with this endeavor. Contact us today.