Jeff Saut revisits some wisdom from Richard Russell and adds his own twist:
In the world we live in, few look at risk. Most only look at reward. The few who do look at risk (the educated, the street savvy) make their money at the expense of the great unwashed majority who swallow the noise nonsense about getting rich quick. Investing is a get rich slowly process. You have to put your money at risk in the face of uncertainty. Emotions run rampant before the uncertainty of floating, fluctuating, often violent and volatile markets. Constantly discounting prices are fickle and full of surprises.
Therefore, when you consider straying away from a compounding type of investment make sure you understand risk and that you get value and a margin-of-safety price concession. Maybe John Burr Williams, a pioneer in the concepts of modern portfolio theory, said it best, ‘The value of any stock, bond or business is determined by the cash inflows and outflows, discounted at an appropriate interest rate, which can be expected to occur during the remaining life of the asset.’
This isn’t as sexy and fun as chasing the latest hot fads, but it is what gives smart, successful, long-term investors their edge. Like Warren Buffett has said, Rule #1 is don’t lose money. Rule #2 is refer to Rule #1.
Jeff’s whole commentary is well worth a read:
“Rich Man, Poor Man!”
Zone of Competence 