My thoughts on Analysts: Richard Russell

I’ve been reading Russell’s Dow Theory Letters since 1990.  When I spoke of Jim Cramer, I concluded that he represented the triumph of intelligence over wisdom.  Russell’s strength is his wisdom, his depth of experience, and his instincts.   

            Russell has a long history of great market calls, calling the major market turns since the 1960s.  I wasn’t even born when he first started writing the Dow Theory Letters, but since I began reading them around 1990, he was skeptical about the late 1990’s stock market boom beginning in around 1997, was advising his subscribers to be cautious for the entire period 1997 through 2000.  In late 1999, he called the bull market top, advising all his subscribers to get out of the market.

 

            In 2002, he became excited about gold, soon after the gold price started heading up.  I was initially skeptical, because he is a long term gold bug, and constantly harps about hoe the Federal Reserve Board is devaluing the dollar (He condescendingly calls former Fed Chairman Alan Greenspan, “Greenie”), and had gotten me interested in gold for a short time in 1996… I got cold feet after about six months at a small profit, but his predictions of a new gold bull market at the time proved to be illusory.  However, in 2003, a combination of his constant harping on gold, combined with my own growing conviction that the world was becoming (and still is) a more uncertain and unstable place, led me to finally follow his advice after gold had climbed from $220 to the mid $300’s.  Considering that it is now over $600, I certainly don’t regret following that advice, any more than I regret being out of stocks (partly due to him) in 2000, and getting heavily into foreign bonds in 2001.  While none of these have been one way tickets, they have all produced excellent long term returns.

 

            Russell is often hard to pin down to one particular opinion about the market, so attributing any particular “call” to his can sometimes be a stretch (however, he does come out and say “This is it!” as he did at the bull market top in November 1999… but calls like this are few and far between.   Since I started reading him in 1990, the 1999 bull market top and the start of the gold bull market in 2002 were the only definitive calls I remember.)  Most of the time he rambles about how the market looks like it might do one thing, but on the other hand, something else might happen.  For instance, he’s been worried about the housing market for years, but even though it now looks like that bubble is popping (or deflating gently, according to the optimists), he never “called” the top.  Admittedly, given the lack of good data for the US housing market, I don’t know how anyone could make that call definitively, even in hindsight.  With hindsight, all we can definitively say is that it happened sometime probably early in 2006, and the precise time depends on your particular housing market.

 

Russell shares his insight, but if he isn’t certain about something, he’ll hedge until he may not have said anything at all.  For instance, on 11/9/06 he worries about the Dow Jones Transports’ failure to “confirm” (follow to the upside) the Dow Jones Industrials to two successive new highs.  “Either the Industrials will pull the Transports higher to a new record high — or the Transports will pull the Industrials and rest of the market down.”  If you think about that too much, you’ll realize that he has not said anything.  But then he goes on to say: “My experience tells me that the Transports will have their way. In such situations, the Average that refuses to confirm is usually the winner.”  So he feels that these recent record highs for the Dow won’t last… but he’s not willing to stick his neck out.

 

I respect Russell for his unwillingness to make definitive predictions.  As he says, the market is smarter than any of us.  Forecasting the stock market is an art, not a science, and anyone who makes precise, definitive predictions is going to be definitively wrong—a lot.  Russell knows this, and knowing his limitations, he gives us a more accurate picture of the market.

 

            I met Russell (and his wife Faye) in 2003 at a hedge fund conference in
San Diego, which is a rare treat, since he never travels.  I most likely would not have attended the conference at all if it had not been for the fact he was attending.  In person, he does not strike a personally impressive figure, and compared to some of the extremely insightful other analysts on hand, in particular
Martin Barnes of Bank Credit Analyst, who struck me at the smartest man in a large room of highly intelligent men (yes, they were practically all men.)

 

At the time, Martin was short-term optimistic for the stock market at the time, and his arguments were penetrating and insightful.  In hindsight, Martin was also right on the money.  Russell, however, maintained his long-term bearish stance, which he has held since late 1999.  I recall Martin challenging him, asking “What would it take to get you to change your opinion?”

 

            Russell, in response said, “I base my opinion on human nature, and I’ll change it when human nature changes.”  What Russell meant by that are that long-term secular market cycles arise from a fact of human nature: We cycle from periods of extreme optimism to extreme pessimism and back over periods of several decades.  Now, we are moving away extreme optimism, which peaked in 2000, and we have a while to go before extreme pessimism is fully here. 

I think both Russell and Barnes were right that day in April of 2003.  We saw the stock market have a very good year in 2003, just as Barnes predicated, but Richard Russell does not tend to focus on short term movements of the market (He talks about them endlessly, in terms of what they might mean, but I’ve never heard him make a definitive prediction.)   We may not know if Russell was (and is) right or not for another five to ten years.  If extreme euphoria emerges again, without a period of extreme pessimism in between, then we will be able to say he was wrong.  If, on the other hand, we see what he calls “Great Values” (P/Es below 10, 5+% dividend yields, and extreme pessimism) before we again see euphoria, we’ll know he was right.

 

It may be a long wait, but investing is not for the impatient.  There are smarter guys than Russell, and he can’t pick a stock out of a paper bag, but if you’re looking for a great feel for the long term trends of the market, I don’t know anyone who is better.

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4 Comments

  1. tomkonrad said

    One other thing I like about Russell. On 1/9/07 he wrote:
    “Wife Faye (who’s a car nut) just bought a new Toyota Prius. She really likes the car. It’s very high tech, switches automatically from gas to electric. Unbelievably quiet car, soft ride, decent pick-up and reasonably good power. Has a navigator, parking warning rear TV, no-key ignition, the electronic works — price $26,300 on special sale. We heard that the Prius was hard to find — not so, there were 19 for sale in the San Diego area. On top of everything else, you get a $1500 tax write-off if you buy a hybrid. Also, hybrids can ride the car-pool lanes, at least here in California. A dial on the Prius tells you how many miles you get per gallon of gas. Running around town and also on the freeway, Faye gets 38 miles per gallon. Toyota sold about 110,000 Prius cars last year, expect so sell many more in 2007. We like this car and recommend it.”

    My thought: Faye needs to lighten up on the gas and brake, and she’ll get better milage. Of course, the wonderful thing about having a MPG read-out is that it trains you to drive more efficiently.

  2. Great thoughts on Richard Russell. However, at times he can contradict the basic premise of compounding which is the basis for his “Rich man, Poor man” article. Dow’s Theory doesn’t all for compounding and instead requires, in some instances, in and out trading.

  3. tomkonrad said

    True, but I don’t see that as a weakness. In the real world of the markets, intellectual rigour should give way to pragmatic diversification. Compounding can form a great basis for a portfolio, but understanding the long term secular cycles of the market can lead to better overall returns.

    The “Rich Man, Poor Man” tactic of compounding is essectially defensive. A rich man can afford to be defensive when times are tough, while the poor man is unwilling to give up the prospect of exceptional returns, even when the market is not priced to deliver them. Which is why the poor man stays poor (or gets poorer). But that does not mean that the rich man cannot take advantage of great returns when they are on offer at secular bear market bottoms. In fact, by taking advantage of defnesive compunding when times were tough, he is likely to be the only one positioned to take advantage of cheap stocks when they are available.

    I’ll never accuse Richard Russell of intellectual rigour… but he knows a great opportunity when he sees it. He outlines this principle in Rule 4 of his Rich man, Poor man article.

  4. […] convinced that we were in the early stages of a Gold bull market, partly based on the arguments of Richard Russell, and partly based on my own conviction that people would come to see the world as an increasingly […]

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