How to Invest Like a 'Rich Man'

Editor's note: Succeeding in the market isn't easy for average investors. But according to our founder Porter Stansberry, some key principles can help. In this piece – originally published in the October 2 edition of Porter's Daily Journal, Porter's free e-letter over at his boutique investment firm Porter & Co. – Porter shares advice from one of his favorite investing legends... And he explains how you can use it to stand out from the crowd.

Richard Russell's Dow Theory Letters was the first investment newsletter I ever read.

Russell was a legend. He started out writing for Barron's. Then, beginning in 1958 and continuing until his death in 2015, he wrote another of his Dow Theory Letters every month.

Many investors relied on Russell's market prognostications throughout his decadeslong career. But I think the most insightful things he wrote were the surprisingly simple and timeless principles of successful investment.

He distilled all of these ideas into a single essay, called "Rich Man, Poor Man." In it, he explained the four laws to help average investors make money in the market...

The Four Laws of Successful Investing

The first law: Time matters most of all.

As Russell explained...

Compounding is the royal road to riches... 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.

And the second? Don't lose money.

Virtually everyone ends up losing money because most people do not understand how to mitigate risk, and they cannot resist their own greed. If you doubt me, just ask any well-known local accountant. They see how much money most people lose on their "investments."

As Russell wrote: "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."

The third law isn't a simple rule, but it's a concept that's critically important.

I explain it this way: The market doesn't owe you anything, and you can't make the market give you anything. The reason why wealthy investors are so much more likely to succeed is that they can afford to wait patiently for exactly the right opportunity.

Russell wrote, "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."

I've been working with investors for almost 30 years. If there's absolutely one thing that sets apart the winners from the losers, it's that wealthy investors know what they're doing (they do not invest in things where they might lose money) – and they're patient.

It takes a long time to build a good business... establish a great brand... or pioneer a new technology. Good investors understand that progress isn't always measured in this month's cash flow. How many times have I heard, "But Porter, that stock you recommended two years ago hasn't even moved yet..."?

If you understood the business and knew it was making great progress, that wouldn't bother you in the least.

I remember when I first began recommending distressed debt to my subscribers in the aftermath of the great financial crisis. One deal that my friend Steve Sjuggerud and I found was a PIMCO closed-end prime mortgage fund that was trading at about half of net asset value and was yielding 29%. Steve mortgaged his house to buy it – and other, similar opportunities.

We went on to average 37% annualized returns on those distressed bonds over the next two years, and many of these bonds paid out high yields for the next four or five years. But still, subscribers complained: "Porter, those opportunities only come around about once every decade"...

That's right. The market doesn't often hand out free money. But it does happen often enough if you're rich and if you're patient. Funny how those two things – rich and patient – seem to go together. Maybe they're linked.

Russell's fourth commandment is probably the hardest for average investors...

You must become a fanatic for understanding an asset's intrinsic value, and you must understand all the factors that create (or destroy) that value.

Different factors matter for different kinds of assets.

Take an oil well, for example. There are a dozen different factors that can make an oil well either extremely valuable – or a liability. The kind of rock is critical. So is the size of the reservoir, the amount of water or gas in the well, the distance to a pipeline or railhead, and the type of crude oil or gas.

If all you know is the price of a stock or the yield of a bond, you don't know the value of what you're buying. And you're almost guaranteed to lose money as a result. But if you can become an expert in three or four different kinds of assets, then you can become a great investor if you'll simply allocate to value.

As Russell says...

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.

One final note about Richard Russell...

When I was fired from my first job in financial research in January 1999 (my boss said I was the least entrepreneurial person he'd ever met), I wrote to Russell asking if he'd consider taking me on as a research assistant for his newsletter. I wrote similarly to half a dozen other investment writers at the time. But Richard was the only person who ever wrote me back.

He sent me a handwritten note, not an e-mail. He complimented my work and told me I would become a big success in this business, and he encouraged me to strike out on my own. Later that month, I wrote my first subscription pitch, The New Railroad, and launched my own newsletter.

Richard Russell was a genius... and a gentleman.

Regards,

Porter Stansberry

Editor's note: According to Porter, if you have money in the markets, now is not the time to lose focus. He says one of America's biggest institutions is about to go broke – and the bond market is sending troubling signals. Yesterday, Porter issued his new warning and shared exactly what he's doing with his own money to prepare... along with the one money move you should make to get ready for what's coming.