Dow Theory Letter", never miss one
What can one say about my friend Richard Russell without using a lot of
superlatives? Richard has been writing and publishing the Dow Theory Letters since
1958, and never has he missed an issue! It is the longest newsletter service continuously
published by one person in the investment business. Richard is now 88 years old, and
writes an extremely popular daily e-letter, full of commentary on the markets and
whatever interests him that day. He gets up at 3 am or so and starts his daily (massive)
reading and finishes the letter just after the markets close. He is my business hero.
He was the first writer to recommend gold stocks in 1960. He called the top of the
1949-66 bull market, and called the bottom of the bear market in 1974 almost to the day,
predicting a new bull market. (Think how tough it was to call for a bull market in late
1974, when things looked really miserable!) He was a bombardier in WWII, lived
through the Depression, wars, and bull and bear markets. I would say that Russell is one
of those true innate market geniuses that have simply forgotten more than most of us will
ever know, except I am not certain he has forgotten anything.
His daily letter is loaded
with references and wisdom from the past and
gives us a guide to the future. (You can
subscribe! – @ www.dowtheoryletters.com)
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. I say “for the great majority of people,” because if you're a Steven Spielberg or a
Bill Gates you don't have to know about the Dow or the markets or about yields or price/earnings ratios. You're a phenomenon in your own field, and you're going to make
big money as a by-product of your talent and ability. But this kind of genius is rare.
For the average investor, you and me, we're not geniuses so we have to have a financial
plan. In view of this, I offer below a few rules and a few thoughts on investing that we
must be aware of if we are serious about making money.
I. The Power of Compounding
Rule 1: Compounding. One of the most important lessons for living in the modern
world is that to survive you've got to have money. But to live (survive) happily, you must
have love, health (mental and physical), freedom, intellectual stimulation — and money.
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
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
But there are two catches in the compounding process. The first is obvious —
compounding may involve sacrifice (you can't spend it and still save it). Second,
compounding is boring — b-o-r-i-n-g. Or I should say it's boring until (after seven or
eight years) the money starts to pour in. Then, believe me, compounding becomes very
interesting. In fact, it becomes downright fascinating!
In order to emphasize the power of compounding, I am including the following
extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306.
In this study we assume that investor B opens an IRA at age 19. For seven consecutive
periods he puts $2,000 into his IRA at an average growth rate of 10% (7% interest plus
growth). After seven years this fellow makes NO MORE contributions — he's finished.
A second investor, A, makes no contributions until age 26 (this is the age when investor
B was finished with his contributions). Then A continues faithfully to contribute $2,000
every year until he's 65 (at the same theoretical 10% rate).
Now study the incredible results. B, who made his contributions earlier and who made
only seven contributions, ends up with MORE money than A, who made 40 contributions
but at a LATER TIME. The difference in the two is that B had seven more early years of
compounding than A. Those seven early years were worth more than all of A's 33
This is a study that I suggest you show to your kids. It's a study I've lived by, and I can
tell you, “It works.” You can work your compounding with muni-bonds, with a good
money market fund, with T-bills, or say with five-year T-notes.
Rule 2: Don’t Lose 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.
Rule 3: 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