most popular piece I've published in 40 years of writing these
Letters was entitled, "Rich Man, Poor Man." I have had
dozens of requests to run this piece again or for permission to
reprint it for various business organizations.
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.
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
items that we must be aware of if we are serious about making
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
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. 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.
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!
order to emphasize the power of compounding, I am including this
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 in 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.
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).
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.
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.
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 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 business.
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.
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.
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
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).
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,
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.
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.
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.
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
Planning is good.
Self-discipline to keep one's plan is good.
"Can't buy me love" -- The Beatles
Compare Rushdoony, "The Royal Virtue"
When you invest your money in a way that charges fixed rates of
interest, to be compounded over time, you are giving money to a lender,
who will take your money and loan it to . . . well, to a loser. To someone
who doesn't have money for his project. He hasn't been blessed by God. He
needs money. He can't wait. He wants it now. He
is a loser.
Is this fair to say: "a loser?"
This is the big question. This may be one reason why the Bible
speaks so poorly of charging interest. (The primary reason is surely
charitable. But there may be much more.)
Everything about Russell's plan seems so reasonable. To condemn it is
implicitly to condemn nearly all Americans. How many people --
good, everyday, middleclass Christians -- have gotten married after
college, gotten a mortgaged home and built up their life by making their
house payments for 30 years? How can these people -- the middle class bedrock of
America -- be called losers?
Because the Bible says they are
- Proverbs 22:7 (RSV)
- The rich rules over the poor, and the borrower is the slave of the
- I Corinthians 7:23
- You were bought at a price; do not become slaves of men.
These conservative, middle class Americans don't have the money they
need for a house, so they borrow. They don't have a responsible, free,
God-honoring, God-blessed family they can turn to, so they borrow from an impersonal
bank. Ideally, their forefathers would have been blessed by God and left
an inheritance for their children. But culturally speaking, each mortgagor
is a person who has not benefited from the patient godliness of a
patriarch like Abraham, and hasn't learned the lessons of cultural
dominion and reconstruction, and so they let a federally-chartered bank debase
the currency for them (your interest-bearing savings are not the only
source for the loan) and become the mortgagee over their home.
By saving with the bank, and earning your compound interest, you are rewarding cultural losers by letting a
bank bestow financial blessings on those who are cursed.
It's true, some people who borrow turn out to be cultural winners, even
Biblically speaking. But you won't loan your money to them directly because there
might be risks involved. You would rather save with a federally-chartered bank, because
they are more experienced (adept) in making people their slaves, keeping them in line so that they will slavishly pay
their interest, thus lowering the risks for you while guaranteeing you higher rates of interest. That means the odds are higher
that your interest-bearing funds are rewarding a cultural loser.
The earning of interest perpetuates a secular culture of long-term