Meeting with my investment mentor – Richard Russell

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This morning presented one of those very special moments that I will treasure for the rest of my life. The occasion was my first one-on-one discussion with the legendary Richard Russell (having only met in groups previously). I am visiting La Jolla, San Diego to attend partner John Mauldin’s annual investment conference and couldn’t let the opportunity pass by to look up the 84-year old author of the Dow Theory Letters in his office in La Jolla Village.

Mr Russell hardly ever takes appointments, but I had the perfect excuse: I have just acquired a copy of the first edition of his book “The Dow Theory Today”, first published in 1961, and he kindly consented to autograph the book.

Images of the cover and the autographed (and personalized!) page are shown below.

richard-russel-pic.jpg

This was a truly memorable encounter as I have been subscribing to the Dow Theory Letters (which have been published since 1957) for the past 25 years, and I consider Mr Russell as my mentor (albeit not in person) in the common-sense faculty of investment.

We shared a few stories as I was sitting next to him in front of the computer screen on which today’s newsletter was taking shape. Although the visit was brief and we did not get to discuss markets in any detail, I thought a few paragraphs from Monday’s Dow Theory Letters would provide readers with an apt summary of how Mr Russell sees the outlook for the stock market at this point in time.

Question: Russell, please answer this, at the January 2008 lows, stock values never came close to what we expect at a primary bear market bottom. What do you make of that?

Answer: I’ve thought about this situation, just as I thought about this same situation at the October 2002 lows. My answer is the following – neither October 2002 nor January 2008 represented a major or primary bear market bottom. Both, I believe, were important secondary or cyclical correction-bottoms within a continuing primary bull market. I see no other explanation. Remember, one of the most important Dow Theory concepts is that bear markets end with stocks at great values. Stocks were not great values in the classic sense at October 2002 or January 2008.

Question: Wait, Russell, whoa – are you telling me that we’ve been in a primary bull market ever since the early 1980s, and that we’re still in that same primary bull market?

Answer: That’s correct. That’s what I’m saying. Somewhere ahead we’re finally going to enter a true primary bear market, maybe one of the greatest and most tragic in history. That future bear market will end with something we haven’t seen since the 1980 to 1982 period, and I’m talking about great values in stocks. And when I say great values I’m talking about blue-chip stocks selling in single-digit price/earnings ratios while at the same time providing dividend yields of 6-7-8%, the kind of yields we last saw at the lows of the early 1980s.

Question: What do you think could bring stocks down to those levels? What might the market be discounting?

Answer: Here I’m only guessing, but I think it could be the dollar losing its reserve currency status. If that happens, the US would no longer possess the incredible and singular privilege of printing the same money in which it is indebted. In other words, the dollar would no longer be accepted by the rest of the world as the reserve currency. And the US could no longer print itself into solvency.

Question: Russell, to get back to your previous statement, you said that we are still in a primary bull market – the same one that started from the lows of the early 1980s. If that’s correct, if we’re still in a bull market, then almost by definition shouldn’t we see new highs in the major stock averages somewhere ahead?

Answer: Strange, almost impossible as that may seem, yes I think there’s a definite chance that somewhere between 2008 and 2010 we will see new highs in the major Averages. The stock market occasionally does the totally unexpected, and you can put ‘new highs’ in the major stock averages on that list.

Consider the following – pessimism has now enveloped almost the entire nation. Estimates of home foreclosures are running into the millions of units. The American consumer is buried in debt and stranded with little or no savings. Manufacturing is slowing down in the US. Leading analysts are competing with each other with bearish forecasts. People are calling the Fed impotent or even helpless in the face of the enormity of the problems we face. On top of everything else, the unfunded liabilities in Medicare and Social Security are running into the multi-trillions of dollars. The presidential candidates do not even want to talk about the nation’s potential liabilities. And on top of everything else, we’re mired in one of the longest and most expensive wars in US history.

Yet slowly, almost imperceptibly, the major stock averages have been building huge bases. Since January 22, the majority of stocks have stopped going down – in fact, they’ve been rising.

In the face of these improving market conditions, the short interest on the NYSE continues to build. The latest statistics, covering the latest two-week period to March 31, show that the short interest on the NYSE has risen to an all-time record high of 16.142 million shares sold short. If I’m correct, if we have concluded a correction in an ongoing bull market, then this is an explosive situation with a record number of shorts locked in on the wrong side of the market. As the market slowly builds strength, these shorts will be forced to cover.

Question: Russell, what kind of fundamentals would you expect to accompany a resumption of the primary bull market?

Answer: An incredible amount of fiat paper (currencies) is being injected into the world markets. There’s also a mind-numbing amount of currency on the sidelines. There is more than $3.5 trillion parked in money market funds in the US. Trillions of dollars are now lodged in the so-called sovereign wealth funds. Arab coffers are bulging with dollars waiting to be spent. I’ve yet to see a figure covering all the currencies that are parked in banks, equity funds, mutual funds, pension funds, and in private hands. The sum total must be almost beyond belief.

Ironically, the longer this recession or whatever you want to call it lasts, the more money will be pumped into both the US and the world economies. Here in the US it now requires over five dollars in debt to generate one dollar of GDP. The creation of new money is massive, with the Fed and world central banks running the printing presses overtime as they seek to ward off recession and bring back prosperity.

Once it is recognized that we are in a bull market and that the market is headed considerably higher, a goodly percentage of this money is going to pour into the various stock markets of the world. The result should be a bull market speculative phase of epic proportions.”

And that, according to the venerable R man, is the lie of the investment land.

Just a last thought: I paid $295 for the first edition book in 2008 compared to its original price of $3.95 in 1961. Any chance of another 47 years of a compound growth rate of 9.6%? But, then again, I am now the proud owner of a priceless item that, as a result of its author’s special place in my life, is not quantifiable in terms of money.

 

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17 comments to Meeting with my investment mentor – Richard Russell

  • Robert Rosenbaum

    I, too, have followed Mr. Russell for years and have much respect for his opinion. And yet I recently read this from March 25, 2008, which is diametrically opposite from your rosy interview above. Please comment upon this exceedingly bearish column:
    http://www.investmentrarities.com/thebestofrr.html

    BEST OF RICHARD RUSSELL

    March 25, 2008

    The US has put itself in the incredible position of fighting an expensive war with borrowed money. Even without the war, the US is living on borrowed money. Our national debt is in the process of surging well past the $9 trillion mark. The wonder is that the dollar is viable at all.

    I note that none of the presidential candidates are even talking about the debt — or the $53 trillion in unfunded liabilities that we are facing. In fact, I believe we have gone so far in our debt and deficit situation that I just don’t see how we’re going to navigate out of it. The dollar, it seems to me, is ultimately doomed. The only question is timing, and here we’re talking the impossible. It brings to mind Keynes’ thesis — “The market can stay irrational longer than you can stay solvent.” In other words, even though the US dollar appears doomed, if you short the dollar, you can very easily go broke before the dollar finally succumbs (in fact, the oversold dollar may be in the process of advancing now).

    So what do we do? I’ve been thinking about this for a long time, and I realize that there is no perfect answer, no ideal defense. You see, for the first time in modern history there are grave doubts about the very viability of our money. Even during the Great Depression, nobody doubted the value of a dollar. The dollar was “as good as gold.” The only problem was — nobody had dollars. Everybody was broke. Deflation swept the land, and money was scarce. I could give you a list a yard long of things I could buy in those days for a nickel. Talk about nickels, I would use nickels to take the subway to school, and I would use seven nickels to buy lunch. A movie cost three nickels. Nickels were useful, dimes were scarce and dollars were treasures.

    Today it’s a different story. Today there are too many dollars around — but the world is questioning the viability of the US dollar. I understand there are places (China, for instance) where people do not want dollars. If they do receive dollars, they exchange them for another currency as quickly as possible.

    The US has two sources of power besides our exports. One is our huge military. And the second is the reserve status of our dollar. If the dollar begins to lose its reserve status, we’re in trouble. It would mean that we couldn’t borrow, or if we could continue to borrow, we’d have to pay much higher interest rates. At some point, even higher interest rates wouldn’t do it. Once our creditors were afraid of taking in dollars, no level of interest rates would convince them to lend to the US.

    OK, that’s the longer term story. The question I ask is — what do you and I do about it? Here’s what I suggest. Divide your assets into three sectors. One third of the total can be in a home preferably owned for cash, no mortgage. That means that you really OWN your home. Another third of your assets can be in gold. The final third should be in cash, and it can be in dollars or even partly in a foreign currency. But frankly, over the longer-term I’m tempted to lump all fiat currencies together, treat them all as a kind of junk. Because there’s nothing behind any fiat currency but the full faith and credit of the respective nation. The viability of all fiat currencies is suspect.

    Nations will lie about the worth of their money as long as they can get away with it. The US repeats its “strong dollar” policy even while allowing the dollar to go down the drain. My guess is that the trouble will start when the oil-producing nations start quietly unloading their dollars. China will likely do the same. Gradually, the word will emerge — “the dollar is a doomed currency.” Diversify as far as you can, and get out of dollars as quietly as you can.

    In the meantime, I’m watching the stock market carefully. So far, following the initial rally from the January lows, the Transports have acted well, and the rest of the markets and averages have either been sinking or just “hanging on.” Few investors have made any money since the January lows. The best you could have done was to minimize losses. It will be fascinating to see how the markets act over the coming weeks. Personally, I’m out of the stock market, so my main interest is academic. Well, that and I watch the markets for hints of things to come.

    I’ll breathe easier as long as one or both D-J Averages (Industrials or Transports) hold above those blessed January lows. But if both the Industrials and the Transports violate their January lows, I’ll prepare for the worst — and by the “worst” I mean hard times.

    A house is a place for you and your family to live in. Gold is eternal wealth. Dollars are units of exchange. With a few of those lowly dollars, you can buy a loaf of bread. I like to keep it simple. A house, gold, cash — what could be simpler?

  • Robert: It all has to do with the extent to which the stock market is already discounting the bad news. In the words (again) of RR: “What I want to get across to subscribers is this — we know the economic fundamentals look bad. We’re reminded of that every day on radio, on TV and in the newspapers. What we’re looking for is the stock market’s reaction to all this hair-curling news. Is the rotten news hammering the market down — or does it seem that the market is marching to a different drummer. Because if the market is marching to a different drummer, that means that the bad news has been fully discounted, and the market is looking ahead to better times.”

  • I have subscribed to RR newsletter in the past; his big picture analysis (or macro trend analysis) is generally pretty good; his writing is very good; his market timing is somewhat suspect; he uses an unsubstantiated and very subjective methodology (i.e., note his recent flip flop or new interpretation of events); he references things like 5 day new high new low in the same breath as making a major market call; I suspect as an investor if you were looking to time the market you would be better off just buying and holding stocks when prices are above their 40 week MA and selling them when they are below. Why go through all the nail biting?

    Lastly, RR’s analysis certainly is good reading, but it would be interesting to hear his analysis (or explanation) of the 75% haircut most OTC equities took in the 2000 to 2002 bear market; I can’t see the NAS getting back to new highs before the next decade and I don’t know of any other market in the history of the world where a 75% haircut was just considered an opportunity to buy the dip in an ongoing bull market.

    Any way, thanks for sharing…

  • Doug Nerland

    Mr. Russell’s advice brings up an important question. Would an investor compromise the diversiifation of bullion by owning gold stocks instead of bullion. I would be interesed to hear some discussion on this issue.

  • Neil Wallace

    I read RR every morning and find Monday a bit dull because there is no column to read!

    I apreciate his honesty and dedication to interperating what the market is saying.
    His take on the current situation is really based on values, a key fundamental of Dow theory. I think he is still saying the jury is out but this is probably a correction in a primary Bull. Which means WATCH OUT ahead when the real Bear strikes.

    As RR says be sure to have no debt , your paid for home and a good measure of GOLD !!

  • Big Al in Chicago

    I too am an RR subsriber and enjoy his comments immensely. A couple thoughts i have sometimes. He had us out of stocks and we missed a pretty good move in 2006 and 2007. That makes me wonder sometimes if maybe his old school thinking works in this new global world. At the same time he was also saying buy gold in 2004 which i did and he absolutley nailed that one. But, sometimes I wonder that maybe Dow Theory doesnt apply as much as it used too in this new global economy. Any thoughts on that?? Big Al

    ps. I’m jealous of your book.

  • Robert Rosenbaum

    i appreciate your response. But in 2 weeks Mr. Russell went from “a house, gold, cash” each allotted a third of his wealth…to “we are in a bull market”. I guess I am in the belief that the Richard Russell from 3/25/08 is more correct than the Mr. Russell who today commented “the market is headed considerably higher”.

  • justin

    mr. du plessis, your blog is nothing but good stuff. i’ve been following the work of your investment crew for a while. mauldin – wow!

    i understand the argument that cash has to go somewhere, so when there’s lots of excess cash hanging around there’s potentially lots of opportunity. and why not spend on assets that have been coming down. the thing is that all that so called ‘dead money’ doesn’t look so ‘wow’ when you compare it to total debt stats. in fact it looks quite paltry.

    “pessimism has enveloped the nation”. really? i’m in canada, and we’re enveloped by the nhl hockey playoffs, and the toronto maple leafs aren’t even in them. no doubt, if you follow markets closely, and if your lucky enough to be following the like of your investment crew, you’ll be totally in tune with the ginormous problems in the world, economically speaking. however, i would argue that the everyday person has little knowledge of the potential for financial doom. ultimately, the economy and thus the financial markets are made up of the everyday people.

    i’m not suggesting the rr is wrong. there is no formula, including dow theory, that can determine right and wrong in the financial markets. all i’m suggesting is that the drummer you speak of may not have gotten around to everybody just yet. i’m gonna keep groovin to this beat for awhile. its only been six months, i still haven’t got my dance down yet.

    thanks for the service…….justin

  • Guy: Richard was actually on the money exiting the US stock markets (including the NAS) in 1999. His first big move after that was to buy gold almost at the bottom in 2001.

  • PDP: I know that RR suggested exiting stocks in 1999, but I must be a little confused by the current statements being made and maybe I haven’t articulated the confusion. It is my understanding based upon his current comments that we are still in a bull market dating back to 1981/ 1982. And because values never achieved bear market values then the lows in October 2002 and January, 2008 are just corrections in a bull market.

    If this is the case, I just find that hard to believe. Despite valuations, a 75% haircut in over the counter stocks would not be considered a bear market no matter how you look it.

  • Jim Hancock

    I’m sure Mr. Russel has forgotten more than I have yet learned about investing, but I find this analysis very suspect.

    1) I think the S&P is a better representative index these days (the DOW is only 30 stocks). It is true the Dow posted a higher high last year (which I believe is part of his argument) …however the S&P posted a HUGE double top (2000 and 2007). I think we are IN a nasty bear market that will last a long time.

    2) His economic analysis has some big gaps also. What would push us back up to new highs before ultimately falling again?? “The market sometimes does surprising things” doesn’t cut it for an answer.

    3) Just this week the S&P was down a whole 12% from the peak …this hardly seems pessimistic given the severity of the series of problems both endured and ahead of us. I am wondering when people are going to start taking things seriously …and when they will realize the Fed is not almighty.

    4) Finally, I find it hard to call a double bottom and the end to the current bear after two stick saves by the Fed! We are still well under the down trend line and we have a head and shoulders pattern that indicates we should go MUCH lower.

    Anyway, I unfortunately I find very little reason to agree with Mr. Russel’s short term view. Longer term I think he is right though …it’s going to turn into a long ugly slog much like the 70s.

  • [...] ———— REQUIRED READING:  Meeting with my investment mentor – Richard Russell –  I have just had my first one-on-one discussion with the legendary Richard Russell. This was a truly memorable encounter as I have been subscribing to his newsletter, the Dow Theory Letters, for the past 25 years, and I consider Mr Russell as my mentor in the common-sense faculty of investment. Mr Russell’s outlook for the stock market is also included in this post. –   Prier Du Plessis – Investment Postcards from Cape Town [...]

  • Loy Weston

    I heard about Mauldin from Arthur Lipper, about Russel from Mauldin and then you from Mauldin. You are all great and RR saved my ass after I took a haircut in 2001. Reason I’m writing is I want to comment on advertising. They way you and some others do it is fine.

    I think Bill Bonner who is also great makes a mistake with his heavy handed stuff that has come along with Wiggon. BTW I have recommended you to all my friends
    and I know some have signed up.

    Thanks for all your hard work.

  • The following is a comment from Richard Russell regarding the critics of his bullish stance:

    “I just don’t think the two Averages are going to violate their respective lows. I’ve held to that opinion for a good many weeks, and for a good many weeks that opinion has seemed ridiculous, impossible and just plain wrong.

    “My critics believe that my stance is dead wrong because they don’t believe that the stock market has the ability to look ahead, to discount three months, six months or even at times a year ahead.

    “But they’re mistaken. I’ve seen the stock market discount coming events too many times to doubt the market’s fabulous ‘see ahead’ ability.”

    I guess time will tell.

  • Ignacio Hormaechea

    Mr. Du Plessis, congratulations on your great blog.

    Concerning Richard Russell, I sea no real contradiction. The status of the dollar and the status of the US stock market are related but certainly are different things. You can have a new leg up or even a new bull market in the stocks, and a falling currency. Just look at the US stock market, measured in other money, for example in EUROS, it topped a few years ago, the same thing if you measure it in gold. I believe that is the point that Mr. Russell is making. Especially for a foreing investor dollar assets must give an outstanding return to compensate the dollar weakness.

    Sorry for my terrible English, best regards from Chile.

  • Jim Hancock

    “My critics believe that my stance is dead wrong because they don’t believe that the stock market has the ability to look ahead, to discount three months, six months or even at times a year ahead.”

    I would respectfully suggest that Mr. Russel does not understand the magnitude of the economic problems we are facing. This is not a run of the mill recession due to the Fed raising rates a bit too high or an increased inventory (unless you count 3.5 million too many houses – as per Mauldin). The financial system broke and it needs time to mend.

    We have just experienced the largest asset bubble in the history of the world (on the heels of the 2nd largest). The vast majority of wealth created during this expansion was a classic misallocation of resources.

    Housing won’t bottom for *at least* another 18 months …have you seen the Case-Shiller Diagram? Also, we currently have a 10 month inventory and it will grow further with all the foreclosures this summer.

    Until housing prices bottom we won’t even know the extent of the damage because we won’t know how far they will fall. They could easily drop 30% and then overshoot to the downside. Until then banks can’t even properly estimate the damage …and until then they won’t feel the full pain of carrying loans on properties no one lives in.

    Further, housing is only one of the many problems we face …add to this the credit crunch, excessive consumer debt, increased unemployment, high inflation, stagnant wages, no MEW anymore, commercial real estate, retail sales dropping, bank counter-party risk (and distrust), off-balance sheet vehicles (SIVs), excessive leverage, falling dollar, etc… and the Fed is running out of bullets fast!

    Finally, did the market discount the future properly in 2000? After the NASDAQ crash the S&P basically did nothing for 6 months (they probably thought it was contained). Finally a year later we got a good drop down to ~1150. A full 2.5 years after the tech wreck we found the bottom around 800. I would hardly call that forward looking.

  • Prieur,

    Congratulations on your meeting with Mr. Russell (and acquiring the book)!

    Didn’t see this post until now, but it must have been a very interesting experience. I have wanted to meet RR since I started reading his newsletter several years ago.

    Cheers,
    David

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