Richard Russell 01 (May 08 - Dec 14)

[iam802]

Extracted from the following article:

The Perfect Business

http://ww2.dowtheoryletters.com/DTLOL.n ... iness.html

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Here's what my dad told me: "Richard, stay out of the retail business. The hours are too long, and you're dealing with every darn variable under the sun. Stay out of real estate; when hard times arrive real estate comes to a dead stop and then it collapses. Furthermore, real estate is illiquid. When the collapse comes, you can't unload. Get into manufacturing; make something people can use. And make something that you can sell to the world. But Richard, my boy, if you're really serious about making money, get into the money business. It's clean, you can use your brains, you can get rid of your inventory and your mistakes in 30 seconds, and your product, money, never goes out of fashion."


......


Now obviously, the ideal business doesn't exist and probably never will. But if you're about to start a business or join someone else's business or if you want to buy a business, the following list may help you. The more of these criteria that you can apply to your new business or new job, the better off you'll be.

(1) The ideal business sells the world, rather than a single neighborhood or even a single city or state. In other words, it has an unlimited global market (and today this is more important than ever, since world markets have now opened up to an extent unparalleled in my lifetime). By the way, how many times have you seen a retail store that has been doing well for years -- then another bigger and better retail store moves nearby, and it's kaput for the first store.

(2) The ideal business offers a product which enjoys an "inelastic" demand. Inelastic refers to a product that people need or desire -- almost regardless of price.

(3) The ideal business sells a product which cannot be easily substituted or copied. This means that the product is an original or at least it's something that can be copyrighted or patented.

(4) The ideal business has minimal labor requirements (the fewer personnel, the better). Today's example of this is the much-talked about "virtual corporation." The virtual corporation may consist of an office with three executives, where literally all manufacturing and services are farmed out to other companies.

(5) The ideal business enjoys low overhead. It does not need an expensive location; it does not need large amounts of electricity, advertising, legal advice, high-priced employees, large inventory, etc.

(6) The ideal business does not require big cash outlays or major investments in equipment. In other words, it does not tie up your capital (incidentally, one of the major reasons for new-business failure is under-capitalization).

(7) The ideal business enjoys cash billings. In other words, it does not tie up your capital with lengthy or complex credit terms.

(8) The ideal business is relatively free of all kinds of government and industry regulations and strictures (and if you're now in your own business, you most definitely know what I mean with this one).

(9) The ideal business is portable or easily moveable. This means that you can take your business (and yourself) anywhere you want -- Nevada, Florida, Texas, Washington, S. Dakota (none have state income taxes) or hey, maybe even Monte Carlo or Switzerland or the south of France.

(10) Here's a crucial one that's often overlooked; the ideal business satisfies your intellectual (and often emotional) needs. There's nothing like being fascinated with what you're doing. When that happens, you're not working, you're having fun.

(11) The ideal business leaves you with free time. In other words, it doesn't require your labor and attention 12, 16 or 18 hours a day (my lawyer wife, who leaves the house at 6:30 AM and comes home at 6:30 PM and often later, has been well aware of this one).

(12) Super-important: the ideal business is one in which your income is not limited by your personal output (lawyers and doctors have this problem). No, in the ideal business you can sell 10,000 customers as easily as you sell one (publishing is an example).


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[iam802]

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MAKING MONEY: The most popular piece I've published in 40 years of writing these Letters was entitled, "Rich Man, Poor Man." I have had dozens of requests to run this piece again or for permission to reprint it for various business organizations.

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 items that we must be aware of if we are serious about making money.

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 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. And you need a knowledge of the mathematics 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.

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 this 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 in 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 additional contributions.

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 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 business.

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 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 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, 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.

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.

[LenaHuat]

Hi iam802

Good reads Thank Q Q.

Regarding Rule 1, it's simply the importance and advantage of starting young.
Ceteris paribus, taking off early yields more.

I like to tell my young mentees how difficult it was for me to catch up (in wealth terms) with my much richer classmates. In the 1960's, some of my classmates were oredi chauffeuered to school. I'm sure their parents had set aside savings for them at a young age.
In my case, I started wealth accumulation much later.

Going by the Table on Compounding, 7 early years of $2,000 annual savings each will reap much more than 39 later years of $2,000 each.
This is the stark arithmetical truth.

[kennynah]

but lest the older ones are discouraged by the fact that one shd start young....

"it's better to be late, than never"

[LenaHuat]

but lest the older ones are discouraged by the fact that one shd start young....

"it's better to be late, than never"

That's the pragmatic truth. Going by the same Table, I will be here till I'm 65.
Not really a bad thing

[winston]

Richard Russell (Dow Theory Letters): US dollar not going out of business yet

“With a number of Mideast nations threatening to remove their currencies from the dollar peg, Treasury Secretary Paulson is getting worried, and again he’s announcing that the US is in favor ‘a strong dollar’.

“Is anyone listening? By this time, no one believes in a strong dollar, but now time may be on the dollar’s side. Here’s why I say that. Check out the chart of the dollar. Are you looking at the latest plunge to 71. That uncorrected decline is almost ridiculous. The dollar is not going out of business yet. In fact, the dollar is long overdue for a correction to the upside.

“The dollar’s direct competition is the euro, and the euro is too expensive. Europe is as afraid of inflation as the US is afraid of deflation. And Europe’s interest rates are too high. The high Euro interest rates are killing business. The pressure in Europe is for lower rates, and the pressure in the US is for higher rates to offset inflation.

This, plus the oversold condition of the dollar, should send the dollar higher. Of course, if oil tops out, that too would help the dollar. At any rate, that’s the way Richard Russell sees it – for now.”

Source: Richard Russell, Dow Theory Letters, June 3, 2008.

[iam802]

Richard Russell on HOPE.

Remember when you last HOPE that the stock price will go up because you are holding on to losses?

http://ww2.dowtheoryletters.com/DTLOL.n ... _hope.html
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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 that 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.

So in the case of this stock, you have value on your side -- and all you need is patience. In the end, your patience will pay off with a higher price for your stock. 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.

Any time you find yourself hoping in this business, the odds are that you are on the wrong path -- or that you did something stupid that should be corrected.

Unfortuneately hope is a money-loser in the investment business. This is counter-intuitive but true. Hope will keep you riding a stock that is headed down. Hope will keep you from taking a small loss and instead, allowing that small loss to develop into a large loss.

In the stock market hope get in the way of reality, hope gets in the way of common sense. One of the first rules in investing is "Don't take the big loss." In order to do that, you've got to be willing to take a small loss.

If the stock market turns bearish, and you're staying put with your whole position. and you're HOPING that what you see is not really happening – then welcome to poverty city. In this situation, all your hoping isn't going to save you or make you a penny. In fact, in this situation hoping is the devil that bids you to sit -- while your portfolio of stocks goes down the drain.

In the investing business my suggestion is that you avoid hope. Forget the siren, hope -- instead embrace cold, clear reality.

[winston]

Richard Russell (Dow Theory Letters): “Happy time” for the US dollar

“If you’re a fan of the US dollar, maybe this is ‘happy time’. The low was recorded on March 17. From there the Dollar headed higher. During May-June the Dollar Index formed what appears to be a head-and-shoulders bottom. This week the Dollar broke out above its bottoming formation and also above its long declining trendline.

Larry Kudlow on CNBC keeps shouting that we need a ‘strong dollar’ and that ‘a strong dollar will set stocks heading higher’. Kudlow may finally be getting his long-awaited strong dollar, but we’ll just have to wait to see whether he gets his rising stocks as well.

“A strong dollar should also be good for bonds, but bonds have more to worry about than just the dollar. They have inflation to worry about plus the possibility that the economy may be turning up.

“Of course a strong dollar would be a negative for gold. There should be strong support at the 850 level, even in the face of a strong dollar. I think gold is simply biding its time as it builds a base for its next advance. By the end of this year, gold should be considerably higher.”

Source: Richard Russell, Dow Theory Letters, June 13, 2008.

[winston]

Richard Russell (Dow Theory Letters): How deep will stock market decline be?

“Russell, you’ve been saying that following the current vicious stock market ‘correction’, you expect a worldwide boom as the massive amounts of currencies on the sidelines finally kick in. Do you still hold to that thesis?

“Answer – That’s been my ‘scenario’. But I’m flexible, as you have to be in this business. I want to see how powerful this downturn in the US stock market and world markets become. I want to see whether the Transports hold above their January lows or whether the Transports finally ‘throw it in’. I want to see how deep this decline goes, and how much damage is done.

“With the price of oil over $135, the oil producing nations are choking on petrodollars. Wealth is building up at an enormous rate in the oil producing nations. Depending on how bad the world economy becomes, this massive build-up in wealth is laying the ground for a potential boom. But first we have to get through the pain, and the pain is increasing as stocks head lower.

“It’s well to remember that even as $130 oil impoverishes the US, it enriches Saudi Arabia and Abu Dhabi and Venezuela. It’s a different world we’re living in today as compared with the world of my youth where the US was master of the universe.

“The immediate task for me and my subscribers is to get through this correction (bear market?) with as little loss as possible. To do this again I recommend cash and gold. I also recommend that you get rid of as much debt as possible. As markets head down, debt becomes an increasing burden. Unfortunately, this market mess is coming at a time when US consumers are holding far too much debt.”

Source: Richard Russell, Dow Theory Letters, June 23, 2008.

[winston]

Here's a question I ask myself. Suppose the dollar goes into a real swoon. I mean supposing there's a real run on the dollar.

You own a house. In the face of a collapsing dollar, would you sell your house? Sell it for dollars? Remember, the dollar is just a fiat currency.

A dollar only possesses value because the US government by fiat mandates that the dollar is legal for payments of all debts. There's nothing intrinsic about the dollar bill that you have in your pocket.

The government says you can use your dollars to pay off all debts (and when you buy something you're indebted to the seller). If the US government did not exist, the dollar would be worth nothing, zip, nada. Not so with gold.

– Richard Russell
Dow Theory Letters