Why The Dumbest Investors Win (it's not why you think) — Transcript

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1. 0:00Meet Dave. Dave’s been trading for 2 years,
2. 0:03which in Wall Street years is the equivalent  of being a toddler who just discovered fire.
3. 0:08His portfolio is up 13% year-to-date,  he just hit it big on a crypto memecoin,
4. 0:14and his confidence is at an all-time high.
5. 0:18Dave’s hobbies include watching  the Wolf of Wall Street, telling
6. 0:22girls at the bar about emerging  biotech companies, and zynning.
7. 0:25It’s safe to say, Dave has what it  takes to become a full-time trader.
8. 0:30So Dave does what any rational person would do:
9. 0:33he calls his broker, lies about his net  worth, and gets approved for options trading.
10. 0:37Fast-forward three months  and Dave is now leveraged
11. 0:39to the max on out-of-the-money Tesla calls.
12. 0:42His strategy? Buy high, sell higher. His risk  management? Prayer. His wife's concern? Why is
13. 0:48$13k missing from our savings account?
14. 0:51Fast-forward three more months and the  Federal Reserve decides to hike rates.
15. 0:55Dave’s portfolio is now down 67%  and his wife’s new favorite hobby
16. 1:00is googling “how to divorce a man  who calls himself a Market Wizard.
17. 1:04This brings us to the question for the video  today: why do the dumbest investors win?
18. 1:08The Dunning-Kruger effect is the  financial markets version of Darwinism.
19. 1:12It explains why dumb people think they’re Warren  Buffett, why smart people think they’re dumb,
20. 1:17and why Dave believes market manipulation  is why his calls expired worthless.
21. 1:23Since 2020, you could have invested in  pretty much any stock and you would have
22. 1:27made money. And if you were on the left-side  of the dunning-kruger curve, where Dave was,
23. 1:32you would have significantly outperformed the S&P.
24. 1:36Traditional investors think investing is  about fundamentals or fair valuations.
25. 1:43But the investors who have outperformed over  recent years buy companies at 650x earnings,
26. 1:49ride trends that make less sense than pineapple on  pizza, and pump their bags to anyone with a pulse.
27. 1:55In fact, I believe it was Warren Buffet that once  said: Why buy Apple when you can buy FartCoin.
28. 2:01And if you zoom out even  further, it gets more evident.
29. 2:04We’ve been in the greatest bull  market in history — 17 years,
30. 2:08715% returns. The S&P’s basically been  on a *bleep noise* bender since 2009.
31. 2:15So over the past 17 years, anything you’ve  invested in would likely have generated a
32. 2:19positive return. And because of this,  investment strategies characterized
33. 2:23by high-beta and irrational approaches,  have outperformed and generated alpha.
34. 2:28Although it hasn’t happened yet, like all great  benders, it must come to an end eventually.
35. 2:33But, when is this end coming?  And how can you prepare for it?
36. 2:37Well, there's two ways.
37. 2:39The first: Sit on cash like  Buffett has been doing. But
38. 2:43that’s boring and you’re not looking  to compound at the risk-free rate.
39. 2:47So that brings us to our second option: Continue  to go all-in and then blame others when the
40. 2:53markets inevitably reverse. You can blame Jerome  Powell, Donald Trump, or even market makers,
41. 3:00but you gotta blame someone because taking  losses on the chin isn’t how investing works.
42. 3:05All this brings us to the  answer to the question of
43. 3:07today’s video… Why do the dumbest investors win?
44. 3:11And the answer is simple. Because retail  investors love volatile, high-beta stocks.
45. 3:16Let’s get a little more technical real quick.  What is beta and why does it matter? Beta is
46. 3:21a measure of the volatility of a stock  when compared to the market as a whole.
47. 3:26Here’s a real example of Beta in play:
48. 3:29Let’s say Amazon has a beta of  1.33. This is essentially saying,
49. 3:35Amazon is 33% more volatile  than the overall market.
50. 3:39So if the markets rise 2%,  Amazon is expected to rise
51. 3:432.66%. And then if the markets fall  2%, Amazon is expected to fall 2.66%
52. 3:50So why does this matter?
53. 3:52Because when the market is up, a high-beta  portfolio, aka a retail investor portfolio,
54. 3:58will outperform versus the  market. And now you got Dave,
55. 4:02who’s looking to book a table  at Nobu to celebrate his genius.
56. 4:06But when the market is down, a  high-beta portfolio is feeling
57. 4:10the effects of gravity. And now Dave  is looking to see if Pei Wei is hiring.
58. 4:15In a bull market, Dave’s high-beta portfolio makes  him the next George Soros. And in a bear market,
59. 4:21Dave’s high-beta portfolio makes him the  next trending post on WallStreetBets.
60. 4:26So next time your friend brags  about their 10-bagger memecoin,
61. 4:29just remember: everyone’s  a genius in a bull market.