How to Become a “Financial Winner”
The past few days have been about finding value.
What is an investor supposed to do when the stock market is expensive? Or when bonds are expensive? Or when real estate or commodities crash?
Successful investing is about understanding price and value. As Richard Russell says, “The wealthy investor tends to be an expert on values.”
Russell wrote the legendary investment letter, Dow Theory Letters. One of his most popular essays was Rich Man, Poor Man.
The letter contained four rules investors “must be aware of if we are serious about making money.”
Rule number three is worth searing into your memory. It’s my favorite of the four rules because it tells us everything we need to do to become a “financial winner.”
It’s tells us about value. In other words, selling what’s expensive and buying what’s cheap. It also tells us about the kind of mental attitude that every investor must have to be successful.
Here’s Russell on rule number three… (emphasis is his)
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 “give away” 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 investor 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, 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, Rich Man, Poor Man
I think everyone should read that again. I’ve read it multiple times today.
There’s so much wisdom packed into this rule…
Have the right mental attitude, be an expert on value, save more than you spend, avoid debt, use the power of compounding, stay away from get rich quick schemes and be patient.
Doing all those things is key to becoming a “financial winner.”
By the way… This rule is for all investors.
It doesn’t matter if you’re the little guy, the market amateur, the neophyte trader or the wealthy investor.
This rule helps the first three get wealthy and the last one to stay wealthy.
Successful investing requires having this kind of mindset. Take the time to think about this over the long weekend and start 2018 off with a bang.