Be A Partaker, Not An Outsmarter

There are two kinds of investors:  Outsmarters and Partakers. 

Outsmarters believe they’re so clever they can beat the system, through inside advice and superior brainpower.  Partakers understand that the best way to make money is to share in the profits of successful businesses, by buying stock in Apple, Cisco, Walmart or McDonalds, for example.

Many investors, especially baby boomers, who are convinced they were born more brilliant than everyone else, begin their investing careers as Outsmarters.  They invariably get outsmarted themselves.

According to Bill Clinton’s autobiography, that’s exactly what happened to them in 1978.  They went into a typical Outsmarter deal-borrowing money to buy land in the Ozarks through Whitewater Development, a company they set up with an insider named James McDougal, along with his wife Susan.  Real Estate is especially tempting to Outsmarters since it’s a game in which the other players often appear to be rubes.  In this case, however, the Clintons and McDougals bought land for $880 an acre from a group that had purchased the property just 19 days earlier for $440 an acre.

The intention of the Whitewater investors was to find people to buy the lots at more than $880 an acre and make a big profit.  But in the end, they found that such buyers did not exist ($440 an acre turned out to be the right number).  The Clintons lost $68,300, according to an accountant’s report they commissioned.

The Clintons are just an example of Outsmarters out there as there are a lot of them.  There are, for example day traders, who think they can profit from tiny ups and downs of stocks over minutes or hours.  I do not doubt that some people can make a profit this way-after all, some people are born with the ability to throw a baseball 100 miles per hour.  But, beyond a tiny fraction of super talented and super-dedicated, day traders eaten up by the transaction costs-the commissions, the spreads between bid and asked prices and the interest incurred in buying stocks on margin.

Other Outsmarters are bottom fishers.  They figure they can identify stocks that have plunged but will soon emerge from the depths.  Occasionally, a smart investor will win by betting on these kinds of stocks, but most of the time…no.  When a stock is exceptionally cheap, there is almost always a reason. 

Remember that a stock that’s fallen can keep falling.  Did Internet Capital Group look like a good buy after it had declined from $196 to $45 in the first four months of 2000?  I sure did, and got burned in the process.  Over the next year it dropped to 34 cents.

Partaking, on the other hand, is the ticket to success in the stock market.  Investing in an index fund with an option to go Inverse (to profit when prices fall) is a way to share in the long-term growth and trend of the U.S. economy. 

My own preference is partaking in the growth of great companies.  Occasionally, it strikes me how incredibly generous the stock market is.  At little cost, I can become a partner in a business like GE, Microsoft or Apple, tagging along on a very profitable ride.