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Richard Russell's Market Wisdom

Written By Brian Hicks

Posted May 28, 2009

Everything I ever needed to know about the beach I learned from an old life guard.

Tanned and slightly gray, Jimmy Silvano was the first “guru” I ever met.

Nobody ever messed with Jimmy, not even Big Wave Dave.

A teacher by trade, Jimmy had spent over 25 years sitting a stand, watching the world go by. He always seemed to know what was coming next, long before anyone else even had a whiff.

So when he said the surf would clean up and be monstourous by the end of the day, everybody grabbed their boards. And when he said there was going to thunderstorm in about an hour, people scrambled to leave the beach — even in the middle of a warm, sunny day.

Keep in mind, of course, this was almost 30 years ago, long before the Weather Channel or the iPhone. Jimmy’s hard drive was the one between his ears.

And when I asked him how he did it, his answer was always the same. “Steve,” he said “you can learn a lot by just watching.”  Not exactly Taoism, but close enough for me.

I’ve been watching ever since.

Wisdom, of course, is where you find it. And like my old pal Jimmy, the markets are full of old hands who have seen it all before.  Among them, Richard Russell is a personal favorite.

Because for over 50 years, Richard Russell has been watching the world go by too. 

Rising long before dawn, he has seen practically every tick of the markets as the author The Dow Theory Letter, the granddaddy of them all. Amazingly, he has never missed an issue.

On top of that, he has survived the Great Depression, the Battle of Normandy, a heart attack, a stroke, and a motorcycle accident. Oh, by the way, he managed to make one of the greatest market calls of all time — the legendary 1974 bottom.

As everyone else was headed for the exits back then, Russell was calmly wading in. That was after calling the top of the market in 1966. Bull market or bear, he has seen his fair share of rallies, real or imagined.

But famous market calls are just the beginning of what you can learn from guys like Russell. Needless to say, he’s pretty sharp in other areas too.

Here are just a few pearls of his wisdom from a letter written long ago entitled “Rich Man, Poor Man.”

In my opinion they are timeless — if not priceless.

Richard Russell on Compounding:

“When I taught my kids about money, the first thing I taught them was the use of the ‘money bible.’ What’s the money bible? Simple, it’s a volume of the compounding interest tables.

“Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. You need knowledge of the mathematical tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.”

Richard Russell on Hope:

“It’s human nature to be optimistic. It’s human nature to hope. Furthermore, hope is a component of a healthy state of mind. Hope is the opposite of negativity. Negativity in life can lead to anger, disappointment, and depression. After all, if the world is a negative place, what’s the point of living in it? To be negative is to be anti-life.

“Ironically, it doesn’t work that way in the stock market. In the stock market hope is a hindrence, not a help. Once you take a position in a stock, you obviously want that stock to advance. But if the stock you bought is a real value, and you bought it right, you should be content to sit with that stock in the knowledge that over time its value will out without your help, without your hoping.”

Richard Russell on Action:

“A few days ago a young subscriber asked me, ‘Russell, you’ve been dealing with the markets since the late 1940s. This is a strange question, but what is the most important lesson you’ve learned in all that time?’

“I didn’t have to think too long. I told him, ‘The most important lesson I’ve learned comes from something Freud said. He said, “Thinking is rehearsing.” What Freud meant was that thinking is no substitute for acting. In this world, in investing, in any field, there is no substitute for taking action.’

“This brings up another story which illustrates the same theme. J.P. Morgan was ‘Master of the Universe’ back in the 1920s. One day a young man came up to Morgan and said, ‘Mr. Morgan, I’m sorry to bother you, but I own some stocks that have been acting poorly, and I’m very anxious about these stocks. In fact worrying about those stocks is starting to ruin my health. Yet, I still like the stocks. It’s a terrible dilemma. What do you think I should do, sir?’

“Without hesitating Morgan said, ‘Young man, sell to the sleeping point.’

“The lesson is the same. There’s no substitute for acting. In the business of investing or the business of life, thinking is not going to do it for you. Thinking is just rehearsing. You must learn to act.

“And I mean literally, it’s a lesson that has saved my life.”

Richard Russell on Time:

“Here’s something they won’t tell you at your local brokerage office or in the ‘How to Beat the Market’ books. All investing and speculation is basically an exercise in attempting to beat time.

“‘Russell, what are you talking about?’

“Just what I said — when you try to pick the winning stock or when you try to sell out near the top of a bull market or when you try in-and-out trading, you may not realize it but what you’re doing is trying to beat time.

“Time is the single most valuable asset you can ever have in your investment arsenal. The problem is that none of us has enough of it.

“So with enough time, you would be rich — guaranteed. You wouldn’t have to waste any time picking the right stock or the right group or the right mutual fund. You would just compound your way to riches, using your greatest asset: time.

“There’s only one problem: in the real world you’re not going to live 200 years. But if you start young enough or if you start your kids early, you or they might have anywhere from 30 to 60 years of time ahead of you.”

Richard Russell on Losing Money:

“This may sound naive, but believe me it isn’t. If you want to be wealthy, you must not lose money; or I should say, you 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 businesses.”

Richard Russell on the Markets and the Little Guy:

“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, and 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, his refrigerator, his car, or his 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.”

Richard Russell on the Markets and the Big Guy:

“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 tends to be 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 ‘giveaway’ 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 investors waits.”

Great stuff, Mr. Russell.

Next week, we’ll take a look at Dow Theory and where Russell believes the markets are headed from here.

After all, you can learn a lot by watching and listening to a guru or two.

That Jimmy sure knew what he was talking about. Old guys rule.

Your bargain-hunting analyst,

 steve sig

Steve Christ, Investment Director

The Wealth Advisory

P.S. If the power of compounding sounds appealing to you, I have developed a 5-stock portfolio of income investments that can send you on your way to building the type of long-term wealth Russell speaks about in his letters. It’s a mix of dividend stocks and municipal bond funds that pay income ranging from 6.23% to 9.14%. Of course, that beats the day lights out of anything else you’re going to find these days. To learn more about The Wealth Advisory, click here.