Investing Values

by Steve Selengut

A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically I’m told, corrections adjust equity prices to their actual value or “support levels”. In reality, it’s much easier than that. Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former “becauses” are more potent than ever before because there is more “self directed” money out there than ever before. And therein lies the core of correctional beauty! Mutual Fund unit holders rarely take profits but often take losses. Opportunities abound!

Here’s a list of ten things to do and/or to think about doing during corrections of any magnitude:

  • Your present Asset Allocation should have been tuned in to your goals and objectives. Resist the urge to decrease your Equity allocation because you expect a further fall in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible. Proper Asset Allocation has nothing to do with market expectations.
  • Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend paying, NYSE companies as they move lower in price. I start shopping at 20% below the 52-week high water mark, and the shelves are full.
  • Don’t hoard that “smart cash” you accumulated during the last rally, and don’t look back and get yourself agitated because you might buy some issues too soon. There are no crystal balls, and no place for hindsight in an investment strategy.
  • Take a look at the future. Nope, you can’t tell when the rally will come or how long it will last. If you are buying quality equities now (as you certainly could be) you will be able to love the rally even more than you did the last time… as you take yet another round of profits. Smiles broaden with each new realized gain, especially when most folk are still head scratchin’.
  • As (or if) the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely. Hope for a short and steep decline, but prepare for a long one. There’s more to Shop at The Gap than meets the eye.
  • Your understanding and use of the Smart Cash concept has proven the wisdom of The Investor’s Creed. You should be out of cash while the market is still correcting. [It gets less and less scary each time.] As long your cash flow continues unabated, the change in market value is merely a perceptual issue.
  • Note that your Working Capital is still growing, in spite of falling prices, and examine your holdings for opportunities to average down on cost per share or to increase yield (on fixed income securities). Examine both fundamentals and price, lean hard on your experience, and don’t force the issue.
  • Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on value stocks; it’s just easier, as well as being less risky, and better for your peace of mind. Just think where you would be today had you heeded this advice years ago…
  • Examine your portfolio’s performance: with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model, because it allows for your personal asset allocation. Remember, there is really no single index number to use for comparison purposes with a properly designed value portfolio.
  • Finally, ask your broker/advisor why your portfolio has not yet surpassed the levels it boasted five years ago. If it has, say thank you and continue with what you’ve been doing. This one is like golf, if you claim a better score than the reality, you’ll eventually lose money.
  • One more thought to consider. So long as everything is down, there is nothing to worry about.

Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional grade rear view mirrors. The short and deep ones are most lovable (kind of like men, I’m told); the long and slow ones are more difficult to deal with. Most corrections are “45s” (August and September, ’05), and difficult to take advantage of with Mutual Funds. But amid all of this uncertainty, there is one indisputable fact: there has never been a correction that has not succumbed to the next rally… its more popular flip side. So smile through the hum drum Everydays of the correction, you just might meet Peggy Sue tomorrow.


“We’re such cowards!” said Martin Whitman, the 82-year-old legendary superinvestor, at a seminar organized by New York Society of Security Analysts ( on February 16, 2006, “We only want to be the senior-most creditors in distressed situations. We only want to be the adequately secured lenders in Europe and overseas. We don’t want to be subordinate to any of the asbestos or tobacco liabilities…” And he brilliantly calls himself the “safe and cheap” investor.

Marty Whitman’s “License To Steal”

The man brave enough to call himself a “coward” is never short of shocking and jaw-opening statements though. Marty Whitman says that he started as one of the “grossly overpaid bankruptcy professionals” in the 1970’s. Seeing that a mutual fund business is “a license to steal”, he entered the money management business in 1990 through the backdoor via a “hostile” takeover of a close end fund and then opening it. He confesses that he “goes to bed” with competent managers who kiss minority owners. And when Whitman got upset at his investors who exited his underperforming value funds in droves during 1989 and 1999, he told a reporter with undisguised relish, “As for dealing with the public, and you may quote me, screw ’em!”

With first-hand knowledge about the mutual fund business, Marty Whitman made large investments in asset management companies like Legg Mason. To Whitman, money management is a great business, better than the toll booth on George Washington Bridge. “Fund managers are prosperous �C no credit risk, no inventory, no fixed asssets, no liabilities, you are talking to the overhead,” laughed Marty Whitman.

There are occasional tough times though. Third Avenue Fund’s asset under management dropped from $50 billion to $38 billion during 1998 and 1999, which prompted Whitman to echo William Vanderbilt’s famous line “The public be damned!”

And that’s vintage Marty Whitman, someone who’s honest and forthright to the core. He arrives for work on Manhattan’s Third Avenue often dressed in an open-collared plaid work shirt, baggy blue cotton pants, worn sneakers, and white socks. One reporter claimed that he observed some sizable holes on Whitman’s socks when he was already a multimillionaire. This author personally saw Marty Whitman carried an old and saggy polyester school bag to his talk at NYSSA. (On my lucky day, I could perhaps pick up a similar bag from a neighbor’s garbage yard, and I am not exaggerating.) You could mistake this superinvestor for a street person. But Marty Whitman is a legend at picking over the balance sheets of troubled companies in search of hidden treasures. And his track record of approximately 17% per year since 1990 speaks for itself.

Safety First
According to Marty Whitman, the “safe and cheap” investor looks for four things in an investment:

* High quality balance sheet;
* Competent and shareholder-oriented management;
* Understandable and honest disclosure documents;
* Priced at 50 to 60 cents on a dollar.

The first three is related to how safe an investment is. The fourth relates to how cheap the stock is. And “safe” is more important than “cheap”.

Assets Over Earnings

The first thing Marty Whitman wants is a “safe” balance sheet featuring high-quality assets, the absence of liability and the presence of cash. Without these, he doesn’t even consider the common stock.

Whitman believes that scrutinizing the balance sheet is easier than trying to forecast earnings and predict stock market gyrations. Most investors are outlook-conscious. He is price-conscious. He hones his easy way of measuring price, quantity and quality. Everything is in the balance sheet – the only way you know whether you’ve covered all the bases is to look at the lists of assets and liabilities.

To Marty Whitman, balance sheets are much more important than the income statement. He believes that security analysis would be simpler if one focuses on the balance sheet while placing no emphasis on the income statement and earnings estimates.

Marty Whitman thinks that earnings and earnings power are vastly overrated. In his book, Value Investing: A Balanced Approach, he advises businessmen not to treat one accounting number, such as the bottom line, as more important than another. They are all part of the whole picture. Besides, profits are may be viewed as the least desirable way to create wealth because of the income-tax disadvantage. It’s a lot easier to look at the quantity and quality of the assets and resources that a company has than to forecast its earnings. Assets can appreciate in value, can be enhanced, sold, or converted into something more productive.

Quality Assets
Graham & Dodd stressed the importance of balance sheet also. But Marty Whitman feels that Graham & Dodd talked more about quantitative instead of qualitative issues about the balance sheet. To Whitman, high quality means low debt, acreage of raw land, assets under management, fully paid rent, and other assets that can be easily valued. For example, some of his companies have huge investments in real estate, which may be classified as fixed assets disliked and ignored by Graham & Dodd. But Marty knows he can sell class “A” buildings with long-term creditworthy tenants easily by picking up the phone.

Marty Whitman thinks like a LBO control buyer. He asks: “How can I finance the transaction?” It is a balance sheet question regarding what can be put up as collateral to secure lending from the bankers.

Marty also has a special eye for well-positioned assets throwing off solid cash flows and using non-recourse debt. Unlike traditional debt, non-recourse debt holders or creditors lack the legal power to bring the debtors to the court or force a reorganization. So non-recourse debt is not a threat to the safety of the stockholders’ position. For example, Forest City has a lot of debt but it is nonrecourse. In other words, the debt is taken on individual properties. The lender can’t force the parent company into a reorganization if there’s a default on a loan taken on a particular piece of property.

In terms of appraising the intangibles, Marty Whitman sticks to the easy ones, like the asset under management of a mutual fund. The intangible media assets are too hard for him. He recently took a look at Tribune Co. (TRB) and turned it down.

Marty Whitman watches out for the so-called-earnings that create “wealth” while consuming cash. If you have earnings that consume cash, sooner or later, you’ve got to have access to capital markets which may not be there when you need them.

Go To Bed With Competent Management
Marty Whitman looks for reasonably competent managing or controlling groups that care about minority shareholders. Community vs. conflict of interests is always the problem facing investors. Sole proprietorship is the only place where there is no conflict of interest.

Marty Whitman thinks that Warren Buffett’s greatest talent is in his ability to judge people and appraise the management. And this special area is exactly where Whitman had the most of his screw-ups. Buffett is a control buyer, too.

Marty Whitman does spend a lot of time talking to the management, but he is much more document-driven than other money managers. “Evaluating the management is the toughest thing I do. By comparison, everything else is easy,” said Marty Whitman. He had been impressionable when executives of semi-conductor equipment manufacturers visited him, feeling that each guy is more impressive than the next. He saw these really great managements that have a sense of urgency – great engineers trying to do good things. He also visited Japan, where they invested in some property-and-casualty insurers, where he thought he was dealing with deadheads who are not driven to create shareholder value.

Understandable and Honest Disclosures

Marty Whitman is very document-intensive. He feels that a company’s documentary disclosures must be understandable so that someone with an I.Q. of 70 should be able to interpret the disclosures. He only invests in businesses where he can appreciate the excellent documentary disclosures from the company. If he can’t understand the disclosure statements, he doesn’t bother to meet the management.

Whitman doesn’t meet the management before he studies the proxy statement, understand the compensation arrangements, analyze past transactions of the management, and scrutinize the accounting choices.

Whitman looks for the kind of company that provides excellent disclosure that supplements required filings and provides non-GAAP measures that is often critical in assessing the true health of a business and its balance sheet.

What Is Cheap?

After scrutinizing the assets, the management, and the disclosures, Martin Whitman makes sure that he places his buy orders at a big discount to the private market values of those quality assets – that is, to the net asset value per share. For example, his second largest position is Forest City Enterprises (FCE-A). When they were buyers, in the early 1990s, its income-producing properties were appraised at $80 to $90 per share. But you could buy all the shares you wanted for $17. The net asset value that Whitman talks about is what a company could sell for in a takeover or a private market auction.

What kind of a discount to net asset value is viewed as cheap by Marty Whitman? “No more than 50 or 60 cents on the dollar for what a business would be worth to a private takeover buyer,” said Martin Whitman. Over 80% of his portfolio companies were acquired at a substantial discount to “readily ascertainable net asset values”. This is not rocket science. A lot of real estate, marketable securities, mutual fund management companies which can be bought at intrinsic values of 3 to 4 % of assets under management (UAM). Toyota Industries is a way of buying Toyota Motors at a meaningful discount.

“It is absolutely crazy to pay more than 60 cents on a dollar for non-controlling interests in businesses. The outsiders always face agency problems,” said Marty Whitman.

Valuation Rules Of Thumb

Marty Whitman has developed his own rules of thumb for calculating his buying prices for various types of businesses:

  • Financial-services companies and depositories: Stated book value.
  • Small banks: 80% of book value.
  • Mortgage portfolio: Calculate yield to maturity and perform credit analysis.
  • Financial-guaranty insurers: Adjusted book value – a publicly disclosed number that is book value plus the equity in the present value of certain future premiums.
  • Insurance companies: Adjusted book value.
  • Real estate companies: Private appraisal value or market value.
  • Real Estate (REITs): Appraisal value or discounted present value of cash flow from operations.
  • Broker/dealer and asset managers: Tangible book value plus 2% of AUM.
  • Operating companies: 10 times peak earnings or below “net asset value.”
  • Tech companies: 2 times book value, less than 10 times peak earnings, 2 times revenue and cash larger than the book value of all liabilities.

Marty Whitman tries not to buy property and casualty insurers. He wants an underwriting loss of zero, but even the managers themselves don’t know what the loss will be. He does invest in other type of financial institutions. He is currently using a 6% discount rate to capitalize cash flow from Hong Kong rental properties whereas those properties could be readily sold at 5% capitalization rate.

“We Are Growth Investors”

According to Marty Whitman, traditional growth investing is essentially paying up for widely recognized growth with the hope that the growth will continue.

“We are growth investors, too,” declared Martin Whitman, “We buy into the kind of growth that is not generally recognized while most other growth investors buy into generally recognized growth and they have to pay up for that.” The key here is to figure out the value of future growth. “Many people on Wall Street know the price of everything but the value of nothing,” said Marty Whitman.

by Bryan Kelleher

The point of investing your hard-earned capital is to attain a lot more money in the future by giving up the enjoyment and use of your cash today.

You want your returns to soar like a jet plane.

But think about how much work goes into pre-flight planning. The ground crew maintains and inspects all mechanical systems. Air traffic controllers make certain all routes are clear. The pilot consults his checklist of procedures that must be completed before take-off. Great amounts of time and resources are spent to keep airline passengers as safe as possible.

In the same way, investors should develop a mental safety checklist before making serious investments in the stock market.

This is why Warren Buffett says that the first rule of investing is never to lose money and the second rule is never to forget rule number one.

The math is simple: if you lose 50% on an investment, you must gain 100% to reach your breakeven level. Another interesting mathematical truth is to look at the performance of two portfolios:

Portfolio A: $1,000 invested, compounding at 8% per year for 4 Years would result in an account balance of $1,360.

Portfolio B: $1,000 invested, compounding at 15% for 3 years, and then losing 15% in the fourth year would result in an account balance of $1,293.

The point is that you want to avoid losses as much as possible.

Sometimes investors tend to emphasize their anticipated returns over all other factors. They get so excited and enamored with sell side analyst opinions and company projections that they often fail to consider all of the problems that can occur with stocks. Buffett has stated that investors would be well advised to pay more attention to credit analysts than sell side analysts.

You cannot control how much your stocks make. But you can control the risks you take when making stock picks.

What are you to do?

As Charles Munger has stated on several occasions:” Invert, always invert.” Instead of thinking about the upside of your investments, you should emphasize the downside that can beset your stocks. The internet bubble of the late 1990’s taught us all powerful lessons about what can happen when focus is applied to promised returns as opposed to all the things that can go wrong. A lot of portfolios crashed and burned.

Just as an airline pilot, most of your efforts and preparation should be directed at avoiding mistakes.

Businesses and markets are competitive and unpredictable. Investors that have prepared for worst-case scenarios, and have not paid too much for their investments will fare the best when inevitable setbacks happen.

Successful investors have developed the skills to assess the financial strength of the companies they have invested in. How much cash does a company have? How much debt does the company carry? Is the company using strange techniques to get debts off the balance sheet?

Next, as an investor, you need to assess a floor value of an investment. You need a method of calculating a “worst case scenario”. If the company were to fall on hard times, or if the stock market goes south, what would the company trade for? An adjusted book value – (tangible assets less all liabilities) would be a good place to start. By focusing on this number, you will get an idea how far a current price of a stock could fall. If you identify an investment where this number is not too far from the current market price, you might have an interesting stock investment idea.

Your final analysis should be to measure the true or intrinsic worth of the security you are considering. Remember, stocks are not just pieces of paper that float around day to day based on nothing. Stocks are actual assets that represent claims to assets that throw off real cash at some point. Companies pay dividends, buyback their shares, merge, reorganize or liquidate. Your job is to estimate the fair value of these future cash flows.

Since you can’t possibly know with certainty the exact value of a company, the key to being successful is to use conservative values and compare these values with the current price of the security in question. Your aim is to find companies with upside potential that are trading near the floor level you have established, and are trading below what you believe is the real intrinsic worth of the company.

You can generate a lot of investment ideas by looking at what the investment masters are doing right here at They are buying fallen angels like Dell and Pfizer.

Often this approach will take you to unpopular or out-of-favor companies. You just have to do more homework than the average investor, and once you arrive at logical conclusions, stick to your assessments.

These steps will not only ensure that you will not overpay for a stock, but they also have the effect of magnifying your returns if the gap between the current market price and intrinsic value narrows. If the intrinsic value of the company also grows, and the market value eventually follows – this is when investment returns soar.

Remember: Before taking off, ask yourself how safe your investments are.

It is not always that you read an article that touches some where close in the heart. I guess this article is one of them.

The article is written by Richard Russell. John Mauldin wrote a intro to this article:

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 80 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 learn more – and subscribe! – at .)

When I asked Richard to contribute an article, I wanted his wisdom more than his actual market theory, and that is what he has given us. You (and your kids!) should read this again and again! Richard lives in La Jolla with his wife Faye.

Rich Man, Poor Man

By Richard RussellMaking 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 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. 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 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 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 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, 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 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 “giveaway” 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.

II. Time

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 $470,000.

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.

How about this real example of beating time. John Walter joined AT&T, but after nine short months he was out of a job. The complaint was that Walter “lacked intellectual leadership.” Walter got $26 million for that little stint in a severance package. That’s what you call really beating time. Of course, a few of us might have another word for it — and for AT&T.

III. Hope

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 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.

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

In the stock market hope gets 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 hope 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.

IV. Acting

ACTING: A few days ago a young subscriber asked me, “Russell, you’ve been dealing with the markets since the late 1940s. This is a strange question, but what is the most important lesson you’ve learned in all that time?”

I didn’t have to think too long. I told him, “The most important lesson I’ve learned comes from something Freud said. He said, ‘Thinking is rehearsing.’ What Freud meant was that thinking is no substitute for acting. In this world, in investing, in any field, there is no substitute for taking action.”

This brings up another story which illustrates the same theme. J.P. Morgan was “Master of the Universe” back in the 1920s. One day a young man came up to Morgan and said, “Mr. Morgan, I’m sorry to bother you, but I own some stocks that have been acting poorly, and I’m very anxious about these stocks. In fact worrying about those stocks is starting to ruin my health. Yet, I still like the stocks. It’s a terrible dilemma. What do you think I should do, sir?”

Without hesitating Morgan said, “Young man, sell to the sleeping point.”

The lesson is the same. There’s no substitute for acting. In the business of investing or the business of life, thinking is not going to do it for you. Thinking is just rehearsing. You must learn to act.

That’s the single most important lesson that I’ve learned in this business.

Again, and I’ve written about this episode before, a very wealthy and successful investor once said to me, “Russell, do you know why stockbrokers never become rich in this business?”

I confessed that I didn’t know. He explained, “They don’t get rich because they never believe their own bullshit.”

Again, it’s the same lesson. If you want to make money (or get rich) in a bull market, thinking and talking isn’t going to do it. You’ve got to buy stocks. Brokers never do that. Do you know one broker who has?

A painful lesson: Back in 1991 when we had a perfect opportunity, we could have ended Saddam Hussein’s career, and we could have done it with ease. But those in command, for political reasons, didn’t want to face the adverse publicity of taking additional US casualties. So we stopped short, and Saddam was home free. We were afraid to act. And now we’re dealing with that failure to act with another and messier war.

In my own life many of the mistakes I’ve made have come because I forgot or ignored the “acting lesson.” Thinking is rehearsing, and I was rehearsing instead of acting. Bad marriages, bad investments, lost opportunities, bad business decisions — all made worse because we fail for any number of reasons to act.

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.