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
And if no outstanding values are available, the wealthy investors 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).
But 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,
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
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.
Rule 4: 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.
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.
But let's indulge in a bit of fantasy. Let's say you have 200 years to live, 200 years in
which to invest. Here's what you could do. You could buy $20,000 worth of municipal
bonds yielding, say, 5.5%.
At 5.5% money doubles in 13 years. So here's your plan: each time your money doubles
you add another $10,000. So at the end of 13 years you have $40,000 plus the $10,000
you've added, meaning that at the end of 13 years you have $50,000.
At the end of the next 13 years you have $100,000, you add $10,000, and then you have
$110,000. You reinvest it all in 5.5% munis, and at the end of the next 13 years you have
$220,000 and you add $10,000, making it $230,000.
At the end of the next 13 years you have $460,000 and you add $10,000, making it
In 200 years there are 15.3 doubles. You do the math. By the end of the 200th year you
wouldn't know what to do with all your money. It would be coming out of your ears. And
all with minimum risk.
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.
Because most people have run out of time, they spend endless hours and nervous energy
trying to beat time, which, by the way, is really what investing is all about. Pick a stock
that advances from 3 to 100, and if you've put enough money in that stock you'll have
beaten time. Or join a company that gives you a million options, and your option moves
up from 3 to 25 and again you’ve beaten time.