On Wall Street, traders and speculators are closing their doors. The Wall Street Journal’s Rachael Levy recently reported:

Boston-based hedge fund Frontlight Capital LP is shutting after fewer than three years in operation, people familiar with the matter said.

Four other hedge funds earlier this month announced they were closing, as investors re-evaluate a once-highflying industry plagued by weak returns.

Through September of this year, Frontlight’s fund, Frontlight Enhanced Macro Master Fund I, LP, lost 4.17%, according to a document reviewed by The Wall Street Journal. The fund lost 5.6% last year. The firm managed about $280 million, the document said.

Such speculators have no use for the ONLY three components of investor success I care about, and you should care about too.

1. Cash flow
2. Compounding and
3. Patience

Over the long term (patience) always leads to capital appreciation. ALWAYS.

Follow the cash, and compounding and time will allow the power of cash to steadily and relentlessly pull capital appreciation forward.

Stick with cash flow always.

Trading, and speculating that there will be a greater fool available to sell your shares to in the future is what has driven these hedge funds out of business. Don’t make the same mistake, focus on my three components for success.

Investing is all about attitude. Are you too eager to take on risk in good times? Too ready to cut and run in bad? Can’t commit to an investing plan? Don’t have the resolve to stick to a sustainable withdrawal rate?

In early 1999 I talked with the former American League MVP, Boog Powell about attitude. I wrote this that May:

I was talking to Baltimore Oriole baseball legend Boog Powell recently. During the baseball season, Boog runs Boog’s Barbecue at Camden Yards in Baltimore. Off-season, he is in Key West occasionally as “guest” barbecue celeb at his high-school buddy’s local spot. Boog will tell you that barbecue is an attitude. Well, successful investing is also all about an attitude. Your mental framework will go a long way in making you a successful investor. The primo way for you to have a winning attitude 100% of the time is to become a programmed investor. Operate on the premise that the economy grows over time, as do corporate earnings, and thus stock prices. Don’t trade in and out. Ride the long wave to prosperity in a risk adjusted way that reflects your age, investment acuity, financial resources, risk tolerance, and need for income from your investments.

Managing your attitude is the hardest part of successful investing. Keeping calm during market turbulence isn’t easy when you’re on your own. Working with a professional can make a difference in your comfort during difficult times. If the last week of market volatility has you looking for guidance, sign up for the Richard C. Young & Co., Ltd. monthly client letter (free even for non-clients). Take some time to read through older letters to understand our steady approach to investing.

Most “get rich quick” schemes end up turning into “get poor quick” schemes. Reach too deep into the risk pool and you’re likely to fall in. I knew that 30 years ago, and in 1988 I wrote:

I’m an ultra-conservative investor at heart…and by intent. I know my reputation in the industry puts me in the most cautious camp possible, and that’s just swell with me. My motto has always been, “Get rich slowly with compound interest.”

At even a 7% rate of return, money doubles in about ten years. In IRA, Keogh and other retirement accounts, over half of total return should come from dividends and growth of dividends.

Dividends are the foundation for any serious investment portfolio. I’ve told you many times that over the 50-year period, end 1986, the Dow Jones Industrial Average compounded at 4.8%. Dividends on average provide a yield of 4.5%. And then there is the 4.6% long-term dividend growth rate that combines with current yield to make dividends the focus consideration in any investment-grade portfolio. Look for a yield that is higher than the yield for the average Dow stock (currently 3.6%); look for dividend growth better than the Dow’s historical 4.6%; and look for a price earnings ratio (P/E) that is below the Dow P/E (currently 14.2x). If you make it your point to select stocks that meet these three initial tests, you will be well on your way to assembling a portfolio with excellent prospects for long-term total return. Don’t be overly anxious about capital appreciation. Let appreciation take care of itself. You want to lock in a relatively high yield and good dividend growth prospects.

The Dow yields have changed today, and buybacks are a bigger part of the investment picture than they were in those days, but the principle remains the same: get rich slowly with compounding.

In September of 1992, I outlined the tragic story of a MLB slugger, Jack Clark who had misspent his money and wound up in bankruptcy. I wrote:

It’s Time for Bankruptcy

Not for you of course. No, I’m writing to you about bankruptcy for Jack Clark, Boston Red Sox slugger, but this story carries a lesson for most of us.

Now here’s a guy—a good guy, too—with a three-year Red Sox contract worth $8.7 million. And yet Jack is bust. He has listed $11.5 million in debts, versus only $4.8 million in assets. Clark owns 18 automobiles, including a $717,000 Ferrari. He dumped over $1 million into the Jack Clark Racing Team and earned next to nothing on it. He owes American Express over $55,000 and Visa nearly $20,000. The guy’s monthly statements must look like a J. Crew catalogue. He owes state taxes. He owes Fed taxes. He owes his agents.

You Need to Protect Your Principal First

Here is a story of financial excess that is truly hard to imagine. Jack Clark is a young man who has earned millions. But he did not have a plan for his financial future. He did not even plan for today. And he did not protect his principal.

Remember last month when I wrote to you about not blowing your principal? For many investors, the accumulation of principal may be short-lived, like a professional athlete’s, or even a one-time shot, such as receiving an inheritance. That’s why it is so important to protect—not plunder—your principal. Jack Clark blew $8.7 million. Who knows what’s ahead for Jack Clark, but it will most likely include starting from scratch financially. Had Jack invested along the lines outlined monthly here, his wealth would have increased with consistency, and his financial worries would today be non-existent.

The lesson here is that whether you have $8 or $8 million, you must have a disciplined, consistent plan for your financial future with first priority given to protection of principal.

Clark’s story turned from bad to worse this year. At age 62, after earning what was estimated to be $15 million during his long baseball career and working for multiple television and radio sports broadcasters, Clark has filed for bankruptcy once again.

Instead of enjoying what should be a comfortable retirement, Clark is starting from scratch once again. He didn’t protect his principal, he spent it, twice.

Don’t make the same mistakes as Clark. Protect your principal with a disciplined, consistent plan for your financial future.

Don’t try to be a know-it-all investor. Building a solid foundation on diversification, patience, value, and compound interest, has always worked for me, without having to “know it all.”

In December 2003 I explained my deliberate method of focusing on dividends and interest to generate compound interest, writing:

Invest for Dividends & Interest

I’m not a speculator or trader, and I don’t offer strategies for either group. Work hard, invest your hard-earned savings regularly for interest and dividends, and let your investments breathe. Let them take the air. Let them work for you as a long-term store of value keyed to the miracle of compound interest. Do you have a compound interest table? Please promise me that you will not start yet another year without the world’s most valuable investment tool on your desk.

You need to be on a specific track in order to ensure your success as a consistent long term compounder of your savings. If I can do it, you can do it. This is especially so since I give you everything you need to be a winner in my monthly letters. As such, I’m darn deliberate about what I recommend to you. I clearly and consistently lay out strategies for both of us. I don’t mince words. You know exactly where I stand. We are on the same team. I beat on a handful of topics to the point of badgering. That’s because 40 years of experience have shown me what works and what doesn’t. I’m excited to be reinforcing these concepts for you each month because I know you benefit from the consistency.

Key West-Style Consistency

As I’ve written in the past, my strategy for us both is not a know-it-all approach. Rather, it is know enough. I insist on keeping it easy and simple. Friends of mine own a neat restaurant here in Key West. This special place has won a Zagat Award for two consecutive years, which, I’m told, is quite rare. Located on the corner of Olivia and Elizabeth, the little white restaurant is the savored province of locals who try to keep good ideas to themselves. My friends’ answer to how they have achieved such great success? Consistency.

Consistency is also the guiding light I shine for you each month, ad nauseum, I’m afraid. Consistency, of course, is about risk management and my basic investor tenet of diversification and patience built on a foundation of value and compound interest.

The simple act of avoiding major losses by diversifying my portfolio and focusing on value and compound interest has allowed me to emerge from the investment war as a winner. It can work for you too if you have the patience and endurance for such a strategy. This method is all about risk management, something I wrote about in December of 2003.

Dead Aim…

“When the difference between life and death can be counted in milliseconds, you need every advantage you can get. Which is why SureFire developed its Special Operations series to be the best extreme-duty tactical illumination tools in the world.”

Risk Management Defined

When SureFire asked operators what they wanted, the company was told a light that could survive a halo insertion or a midnight raid on a crack house. Operators wanted SureFire to deliver a light bright enough to find and blind suspected adversaries. SureFire handhelds can be used as non-lethal “force options.” As the company likes to say, “Shine a SureFire in a suspect’s eyes, and he’s out of the fight.” The company understands that you might not be a Special Forces operator hunting for terrorists in an Afghanistan cave to benefit from the retina-searing white light produced by the 500-lumen M6 Millennium. And you may not need a SureFire weapon light for your Heckler & Koch, Colt, or SIG submachine gun, but, then again, you may. But Special Forces operators around the world take dead aim with SureFire illumination tools as the ultimate in risk-management tools.

Invest for Consistency

Every Special Ops fighter knows that on any mission risk management is the first order of duty. It’s a basic military tenet that also works as a basic financial tenet. Why then do so few investors seem to know anything or care about risk management? Usually because of (1) greed, (2) lack of training, and (3) pressure from salesmen, who account for most of the assets held by individual investors. I’m often shocked when I hear what an investor owns in his or her retirement portfolio. For the most part, investors own portfolios of securities that have been sold to them. It’s true. There’s no way to sugarcoat the deal: Most investors simply own a pile of rubbish.

For four decades, I have been a consistently successful investor, practicing my basic investment tenet of diversification and patience built on a foundation of value and compound interest. I’m sure you can dig up folk who will at least tell you that they make more money than does Dick Young. Perhaps this is the case, but my conservative, balanced approach is suitable for investors who want to avoid debacles and emerge from the investment wars with a comfortable nest egg in retirement.

It can be easy to forget the lessons of the past as the current bull market seems to run infinitely onward. Overextended stock market valuations have a habit of correctly quickly and unexpectedly. Once the crash hits, it’s often too late to rebalance a portfolio into more defensive sectors.

Market rebounds have a similar time horizon. Once investors realize markets are on an upward trajectory, many of the best days of returns have been left behind. If you are caught out of the market, waiting for that perfect moment, it’s already gone.

To avoid the dangers of market timing, develop a strategy that meets your individual goals and objectives today, and implement it rigorously throughout the market cycle. In January 1997, I called market timing a long-odds losers’ bet. Here’s what I wrote back then:

A Startling Expose on Market Gambling

The seminal statistical study on market timing was produced by Towneley Capital Management and reproduced by T. Rowe Price for shareholders. The study covered a 7,802-day trading period from 1963 to 1993. It showed that over the entire period $1 invested grew to $24.30 (in a capitalization-weighted composite of stocks traded on the NYSE, ASE and NASDAQ). If, however, an investor missed just the best 40 days, or only 0.51% of the days, $1 grew to only $6.50. Over 73% of the three-decade gain was blown by missing just the 40 best days. You get the picture. It’s a long-odds loser’s bet trying to jump in and out of markets. You simply can’t afford to miss those few best days, as has been the case for those who have missed the last four months.

When I started in the investment industry in 1964 working for Ed Rosenberg at Clayton Securities in Boston, Dreyfus was king of mutual funds. Today, Dreyfus is less prominent, but still a fine group. Dreyfus offers a nice quantitative fund, Dreyfus Disciplined Stock Fund. The fund’s literature details the fund’s disciplined approach to stock selection along with its view on risk management.

Dreyfus writes, “The fund seeks to neutralize unpredictable investment risk in a number of ways. The fund’s managers are currently committed to the following risk management principals: (1) No market timing, and (2) No industry or economic sector bets.” No doubt Dreyfus’ managers had their hands on a study of cumulative returns done by competitor Vanguard using S&P/BARRA Growth & Value indexes.