Dumb and Dumber was a 1994 movie which tells the story of Lloyd Christmas (Jim Carrey) and Harry Dunne (Jeff Daniels). They are two dimwitted, but well-meaning friends, who travel cross country from Rhode Island to Aspen, Colorado to return a briefcase full of money that was ransom for a kidnapping. This farcical movie could teach us a great deal about two camps of investors in the marketplace today. These are hedge funds and investors who have come into the market out of boredom with the stimulus money from the U.S. government in the pandemic.
Warren Buffett and Charlie Munger emphasize that the key to investment success is weak competition. Recently, two sets of investors, newbie investors through Reddit (and other chatrooms) and hedge fund managers running non-transparent portfolios of immense size, were both blessed and cursed by unusual success at the same time. One of the worst things a market can do to you is reward you for bad behavior and that has happened way more than normal. A quick review is necessary.
- Buy future success for way less than it is worth (value investing).
- Use long duration holding periods to gain your success and reduce taxation.
- Participate in ways that allow you to survive the temporary setbacks the marketplace will deal you.
- Avoid the “bigger fool theory.” Momentum investing is great while it lasts, but when momentum investing gets hit, the declines are dramatically more powerful and less survivable to the average common stock investor.
- Buy popular securities that have been popular for a long time.
- Trade often.
- Magnify your risks with leverage.
- Gang up on short sellers.
It is easy to watch the newbie investors using their stimulus checks to speculate in common stocks and view them as “dumb” investors. They are buying based on short durations, emphasizing options for leverage, and are unfamiliar with the market’s ups and downs. You can almost hear them saying, “So, you are telling me there’s a chance!”