Value Added: Staying In The Game

Here's Tom Heath's latest column on Washington's business community:

I first bumped into Russ Ramsey, a co-founder of investment banking firm Friedman, Billings, Ramsey Group, at the FBR Open golf tournament in Phoenix about five years ago. Russ has been an investor in Washington and its technology scene for two decades, starting with some early home runs with Mark Warner, who went on to become governor of Virginia.

One day at lunch in Tysons Corner we learned that we each were big fans of Warren Buffett. We launched into an hour-long exchange on Buffett's investing philosophy, his company Berkshire Hathaway (which owns a part of The Washington Post) and Buffett's plainspoken annual letters to shareholders.

Russ Ramsey (right) and his high school coach, Ray Bermmerman. A Washington-area native, Russ went on to attend George Washington University on a baseball scholarship and still holds the record for most stolen bases.Photo by Roxanne Roberts.

Russ has left FBR and now runs his own investment company in Northern Virginia called Ramsey Asset Management. A few months ago he sketched out what was happening to the financial markets on the back of a napkin (literally), and told me how there was about $1 trillion or so in bad debt that had to be flushed out of the system.

With the Wall Street meltdown picking up speed over the last two weeks, I wondered if this had something to do with the $1 trillion and the napkin. I phoned Ramsey to ask him what he thinks about all of this, from an investment point of view, and whether I should be buying gold and shoving my cash into a mattress.

First he gave a primer on the current crisis.

"How did we get here? One, we went on a massive credit binge, the biggest ever."

He pointed out how the U.S. has $10 trillion in loans within its banking system, another $25 trillion in loans outside of the banking system and yet another $68 trillion in "credit swaps," which are financial instruments I don't entirely understand, but which Buffett has referred to as "financial weapons of mass destruction."

Ramsey said the world's financial plumbing needs a good flushing, which Treasury Secretary Hank Paulson tried to do Monday with his $700 bailout plan.

"The water has stopped and the water has to get rolling again, with governments standing behind the underpinnings," Ramsey said.

So what should I do?

"Average people should turn off CNBC. They should stick with their financial plan, pay their mortgage, work hard at their jobs, look after their families and have faith in elected officials."

Ramsey called the meltdown "a short-term crisis of confidence in the credit markets."

Then he gave me a little history lesson.

"In the history of financial markets, people talk about different periods. In the Depression, did people make money or lose money?" he asked me.

My answer: investors lost a ton in the Great Depression.

His answer: only if they sold.

You would have done pretty well if you just kept investing the same amount of money at regular intervals, a technique known as dollar-cost averaging.

"From 1929, the peak of the Crash, to 1939, over that 10 years, if you dollar-cost averaged in the S&P 200 every month, you had a 13 percent return annually," Ramsey said.

During the collapse of Lehman Brothers two weeks ago, "if you did nothing the whole week, the Dow Industrial Average was actually flat for the week."

"In investing you only need to know two things: is the future of the company knowable, and is it important? Because if it's important people will care, and if its knowable you can value the future cash stream of the business and put an appropriate number on its value."

This next riff is why Ramsey and I could talk all day.

"Right now is investor nirvana," he said. "Lesson number one: staying power. Two, have a plan. Number three: keep it simple stupid. Know what you own. And four: only borrow money when you can repay it and afford the interest."

His last point reminds me of something I read about Peter Lynch, the Fidelity investing legend who ran the Magellan Fund for years. Lynch said of investing, and this isn't an exact quote, "you either believe in the system, or you don't."

Ramsey's point is the same thing: "Bet on America. It has always worked and I think it will."

Then, of course, he quoted Buffett. If you talk to Russ for more than a few minutes, a Buffett bromide will seep into the conversation.

"Warren Buffett has a great quote where he talks about racing at the Indianapolis 500. And in Indianapolis, they say that 'To finish first, you must first finish.' The point is, you have to have staying power. Anybody who buys a stock who isn't prepared to see it go down by at least 50 percent, hasn't studied market history. Just because a stock goes down by 50 percent doesn't mean the company has lost 50 percent of its value. That's how investors benefit from market hysteria."

Ramsey thinks the equity markets could bounce around for the next one to three years. After that, he said, company earnings streams could be at their lowest multiples in more than a decade.

He said when stability returns to U.S. Treasuries, Libor, spreads and other financial instruments, many of which I do not totally understand, that's when we are past the worst part.

"Watch for normalcy returning," he said. "When you see stability, that will be a sign that the equity markets will function normally and my guess is you will be able to buy a bunch of great businesses at the lowest levels we have seen in 15 years."

By Dan Beyers  |  September 30, 2008; 2:30 PM ET  | Category:  Value Added
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Russ is a very smart guy with very sound advice. If you have the wherewithal to withstand the downturns, no matter how severe, the markets always seem to come back. And while it is easy to take much of his advice, having faith in our elected officials given the shambles they have made of the current situation is hard to swallow. We keep getting asked to turn the other cheek as our retirement accounts dwindle and our mortgage rates go up. Meanwhile our representatives engage in partisan bickering and go on recess. This promises to be an interesting six weeks. Maybe instead of turning the other cheek, voters can turn out the entire House of Representatives.

Posted by: Cooper | September 30, 2008 6:20 PM

they lost money "only if they sold"... or if the companies in which they had stock went bankrupted or dissolved. Shareholder values then disappear for ever.

Posted by: Sylvie | September 30, 2008 9:02 PM

sylvie. it could be clearer. i believe russ said if you held your money in the S&P 200 - there was no 500 back then - from 1929 to 1939, you had the return he stated. that includes, i believe, companies going under. it also includes dividends.

Posted by: tom heath | October 1, 2008 12:15 PM

dollar cost averaging the overall market is a concept that has endured the test of time. specifically dollar cost averaging the S&P 200 during the great depression from the end of December 1929 through the end of December 1939, would have generated a 13% gain, even though the S&P 2oo index declined by 42% over that 10 year period
hope that helps

Posted by: russ | October 1, 2008 2:29 PM

I'm sure Russ is a very smart guy. His perspective about dollar cost averaging is sage and his factoid about the Depression is interesting.
But all of these financial whizzes keep preaching patience while banks are crumbling around us, the Dow is below where it was in 2000 - eight years ago - and the U.S. government owes trillions of dollars of debt. Oh, and the Baby Boomers are about to start tapping into Medicare and Social Security.
It's hard not to be a little skeptical of financial professionals given the current state of affairs.

Posted by: Tom Weaver | October 2, 2008 4:25 PM

"To finish first, you must first finish."
a Rick Mears quote, NOT Warren Buffet. Nevertheless, a silly quote, not a great one, no matter who said it............

Posted by: henry | October 6, 2008 11:01 AM

I actually think the most profound thing in this article could be the quote about finishing. If you never go the full distance, you will never know what you could have accomplished. I use this thinking (in slightly different terms) when I am quilting. I recently started finishing some almost-forgotten quilts I had started years ago, and I am feeling good about them! Not perfect, but who is.

Posted by: Nancy | October 7, 2008 11:17 AM

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