Is all investing and speculation about trying to beat time? That’s the claim by Richard Russell in his chapter of “Just One Thing: Twelve of the World's Best Investors Reveal the One Strategy You Can't Overlook.”
The book was compiled and edited by John Mauldin, who wanted a dozen ultra-successful investors to give him their very best single ideas. Russell was unable to limit himself to one idea and, arguably, the most unique of them was that we’re all trying to beat time, a commodity of which we can never get enough.
Russell was a veteran of World War II who went on to become a financial writer. In 1958, he launched the Dow Theory Letters, a newsletter that continues to be published today, and is the longest, continually-published newsletter by one person for investors. Dow theory is a form of technical analysis, with a helping of sector rotation. It is based on the ideas of Charles Dow, the founder of The Wall Street Journal and co-founder of Dow Jones and Co.
The author’s first big idea was the importance of compounding. Rule number one was that compounding works. He wrote that when he taught his own kids about money, he began by teaching them to use what he called “the money bible.” That was his name for compounding interest tables.
In his view, compounding is the royal road to riches. He cited a study by Norman Fosback of Market Logic, in which Investor B contributes $2,000 per year to an IRA (a registered, tax-advantaged plan) at an average growth rate of 10% for seven years. After that, he makes no more contributions for the rest of his life. He started at age 19 and invested nothing after age 26.
On the other hand, Investor A, who is the same age, makes no contributions until age 26, and then contributes $2,000 per year (through an IRA), every year, until age 65 at the same 10% growth rate.
The results? Investor A contributed $14,000 and had $930,000 at age 65 because his money grew 66-fold. Investor B contributed $80,000 and had $893,704 at age 65 because her money grew 11-fold.
A huge difference, and all because Investor B began contributing at an earlier age, thus allowing more years of compounding. As Russell summarized:
“Investor B, who made 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 additional contributions.”
Rule number two: Do not lose money. More specifically, do not lose big money. In this, he was referring not only to disastrous investments, but also to gambling, bad business deals, greed and poor timing. Don’t approach investing with the wrong attitude.
Rule number three: The wealthy do not need markets because they have all the income they need; the wealthy don’t feel pressured to make money. They also have the luxury of moving among asset classes. When stocks are a great bargain, they buy them; if it’s diamonds, then they buy diamonds instead. And if they see no exceptional value in any asset class, then they can afford to sit and wait. For the rest of us, we feel the pressure to “make money” and “do something.”
Rule number four is to look for value, and Russell argued investors should only step outside the compounding system when they see outstanding value elsewhere.
Beating time
“Here’s something you won’t hear from your broker or read about in the 'How to Beat the Market' books. All investing and speculation is basically an exercise in attempting to beat time,” Russell wrote.
According to him, time is the single most valuable asset in our investment arsenals. And, no one among us has enough of it. He pointed out that if we had an investing life of 200 years, time wouldn’t be a problem because compounding would make us fabulously wealthy. However, we have only a fraction of 200 years. Therefore, Russell wrote:
“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.”
This led to a discussion of hope, and how essential Russell believes it is to a healthy and happy life. But in the stock market, the reverse is true. As he explained it, if you bought a stock that is a real value, all you need to do is to wait patiently. He added, “Hope shouldn’t play any part in this process. You don’t need hope, because you bought the stock when it was a great value, and you bought it at the right time.”
One of the problems with hope is that it will lead you to hold a low-quality stock for too long; you hope the losses will stop so you can get out without a loss, but you end up with a big loss instead. This correlates with rule number two (don’t lose money) and attempting to beat time: You don’t have 200 years to wait while the low-quality stock recovers.
Taking action
In a related vein, Russell discussed the need to take action. He offered this important idea from Sigmund Freud, the pioneering psychologist, who said, “Thinking is rehearsing.” A rehearsal, obviously, is not an action, it is preparation for action. You must act on your ideas.
You must learn to act, according to Russell, and that is "the single most important lesson that I’ve learned in this business.” He concluded:
“The reasons to act are almost always better than the reasons you can think up not to act. If you, my dear readers, can understand the meaning of what is expressed in this one sentence, then believe me, you’ve learned a most valuable lesson. It’s a lesson that has saved my life many times. And I mean literally, it’s a lesson that has saved my life.”
Conclusion
In his article for “Just One Thing: Twelve of the World's Best Investors Reveal the One Strategy You Can't Overlook,” Russell gave us several of his best ideas. Yet, I believe those ideas can all be placed, at least roughly, under the heading of beating time.
Compounding, quite obviously, is about time. As the article pointed out, if you invest early enough, you can beat it. Rule number two, not losing money, fits too because many “desperate” investments and gambling forays are undertaken in hopes of beating time. The wealthy, as introduced in rule number three, have no need to beat time. Rule number four says to always look for value, which means letting time work for you.
Read more here:
- Just One Thing: 'Skill and Information Are Your Remedies'
- Just One Thing: 2% More?
- Just One Thing: Challenging a Risk and Return Myth
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