There’s a scene in the 1994 screwball comedy Dumb And Dumber that can be converted into pretty bulletproof financial advice.
Stars Jim Carrey and Jeff Daniels are on a cross-country journey in a fur-clad van designed to resemble a shaggy dog when they get into an argument. Carrey, to drown out Daniels, proceeds to stick his index fingers into his ears and shout, “La! La! La! La! La! La! . . . ”
It’s one of the most GIF-able moments of Carrey’s career, and in times when ultra-speculative assets are inexplicably soaring, the scene seconds as a financial approach that can save you money and is likely being deployed by the world’s greatest investors, like Warren Buffett and Charlie Munger.
You have the right and freedom as an investor to do exactly as Carrey does in Dumb And Dumber. You can stick your fingers in your ears, scream loud noises and attempt to ignore the hysteria. You won’t go broke by doing so, and your portfolio of investments won’t unravel before your feet as you miss out. In fact, odds are you likely will be far better off doing so than if you were to pay close attention to the theatrics.
In recent years, speculative surges in Bitcoin, pot stocks, fake meat stocks, blockchain penny stocks and, most recently, electric car company Tesla, have captivated investors. Some likely made good money in these surges, many others may have hurt their portfolios by buying at the height of the mania. On the other side, those betting against these speculative assets might have lost their shirts, or held on long enough to earn some profits, but it’s about as risky a way there is to try and make money.
On October 16, 2019, Tesla, led by billionaire entrepreneur Elon Musk, was a super innovative electric car company possessing a murky financial picture and legitimate questions about its leadership and production capabilities, and it owned a speculative $50 billion valuation on public markets. When Tesla opened trading on Tuesday morning, it was still a super innovative electric car company possessing a murky financial picture and the same questions into its business model, but this time it carried a $160 billion-plus market value, far more than the entire U.S. automotive industry combined.
In the interim ten weeks, a frenzy has taken hold and accelerated in 2020 as the company’s shares more than doubled in just over a month. You, as an investor, have a few options here if you don’t already own Tesla. You can try to join the mania and see if Tesla will rise further. You can try to short Tesla. Or you can perch on the edge of your seat watching financial television and every tick of Tesla’s volatile stock, shifting between pangs of “FOMO” and Schadenfreude, depending on where the stock heads. Or you can just ignore the whole ordeal and move on to other things.
I’d recommend the latter.
It is true, you will miss out if Tesla again doubles in February, or if it eventually rises to, say, $6,000 a share, as some large Tesla investors expect. That seems unlikely, given Tesla produced just 367,500 cars last year, generated a net loss, but did report positive cash flow to investors. A few good things have happened to Tesla over the last 16-months. In late 2018, the Securities and Exchange Commission offered a soft resolution to a market manipulation probe against Elon Musk, which allowed him to keep his job with the company. Tesla began to build impressive production facilities in China. Some of the bottlenecks that had plagued its Model 3 rollout were fixed, causing its car production to surge 50% during the year. Even better, investor fears over the company’s cash balances seem to have abated after a mid-year capital raise.
But even if Tesla does continue to gain momentum as a business and see its stock soar, nothing bad will happen to you if you miss out.
Your investment money is likely held in a stock market index fund, or some blend of stocks and bonds. That’s done just fine even if your portfolio doesn’t own any Tesla. And, over the long term, it’s likely your portfolio will continue to do just fine, regardless of what happens to Tesla.
The S&P 500—which is the index that is tracked by trillions of dollars in American retirement assets (and likely your own portfolio)—rose nearly 30% in 2019. For older savers, or those who take a more conservative approach, balanced funds that blend stocks and bonds in a somewhat defensive manner returned about 20%. Over the past decade, the S&P 500 has returned 14%-plus, according to FactSet data. Go back 15 years to capture the highs and lows of the financial crisis era and the S&P 500 has returned 9%-plus, in line with the market’s 10% average annual return over the past century.
Unlike Tesla, the market isn’t in the grips of a speculative surge. Even after trillions of dollars have been made by retirement accounts tracking the S&P 500 during this long bull market, valuations aren’t anywhere near Tesla’s over 150 times price-to-free-cash-flow ratio.
As of Monday, the S&P 500 was trading at a forward price-to-earnings ratio of 18.3 times, according to data provider Refinitiv. That multiple, while expensive, is within the realm of long-run averages and is tracking alongside soaring corporate profits, particularly among large-cap technology stocks like Apple, Amazon, Google and Microsoft, which are heavily weighted in the S&P 500. Better yet, if Tesla does turn into a consistently profitable and well-governed corporate giant, it will be added to the S&P 500 and to your retirement portfolio. You could miss out on some of the gains, but at the end of the day it doesn’t really matter.
A few years ago, at Forbes’ 100th birthday party, Warren Buffett articulated this point by offering an uncharacteristically striking stock market prediction. He predicted the Dow would exceed 1,000,000 by the time 2117 rolls around and Forbes turns 200 years old. It was a conservative forecast, which assumed a sub 5% annualized return over the ensuing century, about half of long-run averages. But it was part of a broader point Buffett has been trying to hammer home in recent years.
Investors can miss out on hot stocks, calling market bottoms or exiting at market tops, and odds are they will still do well. What’s more important than timing these market highs and lows, or correctly trading the next mania, is simply maintaining a long-term investment. The market will do the work for you. Put another way, though today’s hot stock may offer alluring short-term gains, the market’s return over time is sufficient for the average investor.
When Bitcoin surged to about $20,000 per coin, I recommended the very same response as in this column. Since then, Bitcoin’s fallen. It first fell sharply, but then recovered somewhat. Many people lost money. That was my hunch amid the frenzy, but no one can really predict these things, especially not me.
Even if Bitcoin had continued to soar, the S&P 500 did just fine, and you did just fine simply sticking with your existing financial plan. That was a piece of advice that had extremely high odds of working out in the end. Afterwards, Bitcoin speculators moved on to pot stocks like Tilray, which soared, then plunged. More often than not, these frenzies prove to be disappointing. Savings are drained. People get hurt.
Thankfully, the best option is also the easiest one to take. Just ignore it.
