On this date in 1980, Richard Russell said:
If You Leap, You Will Fall
“Let’s trot out an old but very useful market adage. It is that a trend is taken to continue in force until proved otherwise. We can be suspicious, we can hate the market, we can be out of the market, we can talk the market down to our friends and neighbors, but brother, we better not put out shorts until we have hard evidence that the bull trend is over and the bear is firmly in command-that is if we want to stay solvent (Russell, Richard. Dow Theory Letters. Letter 777. February 27, 1980. page 1.).”
Another way of saying the above is as follows:
“The wish must never be allowed to father the thought (Rhea, Robert. The Dow Theory. 1932. Barron’s Publishing. page 26.).”
Obviously staying solvent should be the primary goal. However, you need not invest to “stay solvent.” For all intents and purposes, even a person who “saves” in the traditional sense loses money by way of inflation and taxes. However, the fact that someone would chose to invest requires accepting that some or all money invested can be lost.
Most investors seem to get into the stock market or a specific stock because they think their investment will do well. Seldom does an investor buy a stock hoping that it will lose money or languish. Warren Buffett is among that rare group of (successful) investors who could make that claim. In his annual report to shareholders, Buffett said the following:
“Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period? I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years (source: 2011 Berkshire Hathaway Annual Report. page 6).”
Maybe Buffett can “afford” to have such a cavalier attitude about a technology stock like IBM after not buying any tech stocks which has cemented him as the world’s premier investor. However, we believe that having Buffett’s thought process could help in dealing with not allowing the wish to father the thought. Otherwise, the concept of investing and hoping becomes a feedback loop that ends with inaccurate conclusions such as, “I’m never investing in stocks again, it is a scam run by manipulators and thieves. I’m going to put my money with an advisor and let her deal with the headache when I start ‘losing’ money.”
Russell’s Market Theorems
“There’s been more money lost trying to beat inflation than has ever been lost through the ravages of inflation (Russell, Richard. Dow Theory Letters. Letter 777. February 27, 1980. page 2.).”
It seems that Russell’s point about inflation was probably directed more toward individuals. However, the point about losing money in an effort to beat inflation is most often perpetuated by the government. The manifestation of government involvement with fighting inflation occurs with changing the metrics when it comes to cost of living adjustments associated with things like social security payments or underestimating inflations impact on long-term liabilities like government debt. Rampant inflation has a staggering effect on the status quo in governments and therefore receives a lot of attention. However, most individuals are intuitively resigned to inflation as a part of their lives and feel there is little they can do about it. For some individuals, investing of any sort is the lesser of evils when considering the alternatives.
Commodities Saying Something?
“One remarkable feature of today’s markets is the lackluster performance of most commodities. The ‘war babies,’ sugar, copper end cotton have made big moves but the grain complex and the meats are dead. With inflation roaring, this has come as a total shock to most commodity traders. Frankly, I have been wondering what the ‘tired’ grain and meat prices mean. Are they seeing something that we aren’t? (Russell, Richard. Dow Theory Letters. Letter 777. February 27, 1980. page 5.).”
According to the price action that followed, the collapse in grains and meats might have portended what was to come in the commodity market.
From the late February peak the CRB Index declined –36.82% while the decline from the late November 1980 peak was –45.35% to the late February 1999 low.
