Investing Lessons from the Dude. “Or, uh, His Dudeness, or uh, Duder, or El Duderino if you’re not into the whole brevity thing.”

 Dude

The part of The Dude in 1998 Coen Brothers’ film The Big Lebowski is played by Jeff Bridges. The movie is so popular that it became the inspiration for Dudeism, which has been called “a religion, philosophy, or lifestyle.” The entry for Dudeism in Wikipedia describes it as: “essentially a modernized form of Taoism stripped of all of its metaphysical and medical doctrines.” In December of 2014 The Big Lebowski was designated by the Library of Congress as a “culturally, historically or aesthetically significant” film that should be preserved for future generations. They described the movie as a “tale of kidnapping, mistaken identity and bowling.” In a 2001 essay entitled That Rug Really Tied the Room Together, a writer argued that the movie represents a counter narrative to the post-Reaganomic rush for return on investment. The Big Lebowski is more accurately characterized as a funny movie. Nevertheless, The Dude does teach a few lessons that can help you become a more successful investor.

1.The Dude: “Sooner or later you are going to have to face the fact that you’re a moron.” 

One of the most important lessons you can learn about investing is the location and importance of your “circle of competence.” The task is simple: How do you avoid the investing areas in which you are a moron? These areas are like blood cells, since everyone has them. In other words, mistakes tend to happen when your do not know what you are doing.  It is therefore wise to stay within your circle of competence. The most effective way to learn the importance of a circle of competence is to personally make mistakes while investing. It is less painful to learn this lesson vicariously by watching or reading about the experiences of other people, but it is not nearly as vivid as peeing on the electric fence yourself.

2. The Dude: “It’s like what Lenin said… you look for the person who will benefit.”

 If someone is selling you something, it is always wise to ask yourself: “Why are they selling?” What are the motivations of this person or organization? Are they aligned with my interests? Charlie Munger puts it this way: “If the incentives are wrong, the behavior will be wrong. I guarantee it. I’ve been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I’ve always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower.” Warren Buffett agrees with Munger: “Always look at how much the other guy is making if he is trying to sell you something.”

3. The Dude: “You brought the f***in’ Pomeranian bowling?”

Staying focused on what Michael Mauboussin calls “the investing process” is something all great investors do.  Mauboussin writes: “If you compete in a field where luck plays a role, you should focus more on the process of how you make decisions and rely less on the short-term outcomes. The reason is that luck breaks the direct link between skill and results—you can be skillful and have a poor outcome and unskillful and have a good outcome.” Mauboussin believes a wise investing process has three elements: 1) you must find something the market does not believe and you must be right about that belief; 2) you must have control over your behavioral biases; and 3) you must not have organization issues that get in the way of a sound decisions. Remember that in investing and bowling no one calls a strike on you.

4. The Dude: “Sometimes you eat the bear and sometimes… well, he eats you”

Business cycles inevitably happen. You cannot predict their timing, but you can prepare for their arrival. The good news is that markets cycling back and forth between fear and greed present a rational investor with an opportunity to benefit, if the investor  purchases assets at a bargain and doesn’t try to time market prices. This is a hard concept for some people to grasp. The concept is simple: you wait for a bargain price and and then you wait again for the price of the asset to rise. In other words, you believe something will happen in the future, but you do not know when. If you are having trouble with this idea, I suggest you read Seth Klarman’s book Margin of Safety. If you are not patient enough to wait, then buy a low cost diversified portfolio of index funds.

5. The Dude: “Ya well that’s just like, you’re opinion man.”

You should adopt the same view as The Dude when reading investment bank analyst reports or listening to other pundits. Opinions are like blood cells. Everyone has them. It is important to understand any analysts is trying to accomplish in making a prediction. What are they selling? Also ask: are they credible as forecasters? What is their record as a forecaster. Munger makes the case perfectly:

“How many in this room would have predicted negative interest rates in Europe? Raise your hands. [No hands go up]. That’s exactly the way I feel. How can I be an expert in something I never even thought about that seems so unlikely. It’s new territory. I think it’s highly likely that the people who confidently think they know the consequences – none of whom predicted this – now they know what’s going to happen next? Again, the witch doctors. You ask me what’s going to happen? Hell, I don’t know what’s going to happen. I regard it all as very weird. If interest rates go to zero and all the governments in the world print money like crazy and prices go down – of course I’m confused. Anybody who is intelligent who is not confused doesn’t understand the situation very well. If you find it puzzling, your brain is working correctly.”

6. The Dude: “Look, pal, there never was any money. The Big Lebowski gave me an empty briefcase, so take it up with him, man.”

Always be on the lookout for scams and frauds. As an example, Jason Zweig descried how authority and scarcity were used by Bernie Madoff to rope clients into the fraud:  “The initial marketing often was in the hands of what one source described as ‘a macher’ (the Yiddish term for a big shot). At the country club or another exclusive rendezvous, the macher would brag, “I’ve got my money invested with Madoff and he’s doing really well.” When his listener expressed interest, the macher would reply, “You can’t get in unless you’re invited…but I can probably get you in.” If a possible investment is too good to be true, it probably is.

7. The Dude: “By the way, do you think that you could give me that $20,000 in cash? My concern is, and I have to, uh, check with my accountant, that this might bump me into a higher, uh, tax…”

This is untypically bad financial advice from The Dude. Despite what he says about taxes, it is always better to have income than a deduction. Charlie Munger gives this advice:

 “…in terms of business mistakes that I’ve seen over a long lifetime, I would say that trying to minimize taxes too much is one of the great standard causes of really dumb mistakes. I see terrible mistakes from people being overly motivated by tax considerations. Warren and I personally don’t drill oil wells. We pay our taxes. And we’ve done pretty well, so far. Anytime somebody offers you a tax shelter from here on in life, my advice would be, don’t buy it.”

8. The Dude: “So if you could just write me my check for ten percent of a half a million… five grand… I’ll go out and mingle.”

The Dude is teaching an important lesson by example: Never do important financial math when you are drugged and semi-conscious. It is just that simple.

9. The Dude: “This is very complicated…. You know, a lotta ins, a lotta outs, lotta what-have-yous.”

Howard Marks said once: “I keep going back to what Charlie Munger said to me, which is none of this is easy, and anybody who thinks it is easy is stupid.” If investing was easy, everyone would be rich. Investing successfully requires work. As just one example, you need to work to find information that will lead you to investments that have positive expected value. Marks adds: “The expected value from any activity is the product of the gains available from doing it right multiplied by the probability of doing it right, minus the potential cost of failing in the attempt multiplied by the probability of failing.” Making at least some investing decisions is unavoidable. Even if you have decided to adopt a diversified portfolio of low cost index fund approach, you must select the funds. If you don’t do at least some work, the odds are significant that you will screw even that up. Passive investing is a misnomer. All investing is somewhat active, with some approaches far more active than others.

One point to consider is whether a low cost index fund investing approach enables a person to be more “Dudeist.” One tenant to Dudeism is expressed in this this way by the Rev. Dwayne Eutsey, The Arch Dudeship:

The world is shaped by taking it easy;
It cannot be shaped by undudeness.
If one tries to steer it, the plane crashes into the mountain.

There is certainly significantly less “steering” with index fund investing, which not only leaves more time for bowling, drinking, bathing and hanging out with friends but also decreases the chances your investments will be destroyed in a plane crash. Most people should emulate the Dude their investing.

If you decide to be “undudely” by picking individual stocks, bonds and other assets, you really have a lot of work to do. Do you enjoy it? Would you rather be at a bowling alley? When you write down your investing record and look at it objectively, how does your record compare to a low cost index-based alternative? Are you willing to do the work required to overcome you biases so you can make rational investing decisions?

Even people who are picking individual stocks, bonds and other assets can learn from the Dude. As an example, one of the hardest things to do as an investor is to not be overly focused on daily price variations. Watching asset prices wiggle back and forth can be mesmerizing. But watching prices move all the time can make people do nutty things. Unfortunately, many investors seem to think there is some sort of a financial prize for hyperactivity, when it is in fact a penalty because of fees, costs and the potential for more mistakes.

10. The Dude: “And, you know, he’s got emotional problems, man.”

Most mistakes in investing can be traced to causes that are psychological or emotional. One way to make fewer mistakes is to devote time and energy to learning about behavioral biases. Your goal should be to know yourself better so you make fewer mistakes.

11. The Dude: “I’m sorry, I wasn’t listening.” 

Confirmation bias is a powerful human characteristic. People far too often refuse to listen to anything that may conflict with what they believe.  This is part of the reason why it is important to evaluate whether you have changed you mind about something important in the last year. If you have not made such a change over the past year you probably aren’t listening. In the scene from the movie where the quote appears The Dude is not listening to the Malibu Police Chief. The words of the policeman are not pleasant so the Dude just blocks them out. In doing due diligence and research on a possible investment people too often see what they want to see. We all need friends who can tell us when we are not being objective.

12. The Dude: “I can’t be worrying about that shit. Life goes on, man.” “The Dude abides.”

Learning from the past is a good practice, but it is more important to stay focused on the present. The past is, well, the past. Don’t dwell on your mistakes. Learn from them and move on. Abide.

Notes:

The Big Lewowski trailer: https://www.youtube.com/watch?v=cd-go0oBF4Y

The Best of Big Lebowski: https://www.youtube.com/watch?v=V0aDEvmf5u0

Too good to be true: https://www.youtube.com/watch?v=1S0Ps7CQVyU

Cognitive Bias Codex:     http://ritholtz.com/2016/09/cognitive-bias-codex/