How Not To Invest - Barry Ritholtz

Barry Ritholtz is one of the most respected managers and most trusted financial advisors in the business. He's just released a book, How Not To Invest: the biggest and most common investing mistakes, and the dumbest, most wealth-destructive thinking. I haven't read it yet but if its anything like his long-running blog, The Big Picture, it will be full of rational ideas and written just as much for those of us who are not finance professionals. You can also catch some Barry on his Bloomberg podcast, Masters of Business. 

I'm republishing his blog post from today, an attempt to strip his book down to a small pile of simple concepts. As usual, he sees things clearly. 

I highlighted a couple of sentences I found particularly timely this month. Enjoy!

— Robin

https://ritholtz.com/2025/03/biggest-ideas-in-hntii/

It is March 18th! Publication day is finally here!

The challenge in writing “How NOT to Invest” was organizing a large number of ideas, many of which were only loosely connected, into something coherent, understandable, and, most importantly, readable.

It took a while of playing around with the concepts, but eventually, I hit on a structure that I found enormously useful: I organized our biggest impediments to investing success into three broad categories: “Bad Ideas,” “Bad Numbers,” and “Bad Behavior.”

That insight greatly simplified my task of making the book both fun to read and helpful for anyone interested in investing.

Here is a broad overview of each of the 10 main sections, which can help you quickly grasp the key ideas in the book.

Bad Ideas:

1. Poor Advice: Why is there so much bad advice? The short answer is that we give too much credit to gurus who self-confidently predict the future despite overwhelming evidence that they can’t. We believe successful people in one sphere can easily transfer their skills to another – most of the time, they can’t. This is as true for professionals as it is for amateurs; it’s also true in music, film, sports, television, and economic and market forecasting.

2. Media Madness: Do we really need 24/7 financial advice for our investments we won’t draw on for decades? Why are we constantly prodded to take action now! when the best course for our long-term financial health is to do nothing? What does the endless stream of news, social media, TikToks, Tweets, magazines, and television do to our ability to make good decisions? How can we re-engineer our media consumption to make it more useful to our needs?

3. Sophistry: The Study of Bad Ideas: Investing is really the study of human decision-making. It is about the art of using imperfect information to make probabilistic assessments about an inherently unknowable future. This practice requires humility and the admission of how little we know about today and essentially nothing about tomorrow. Investing is simple but hard, and therein lies our challenge.

Bad Numbers:

4. Economic Innumeracy: Some individuals experience math anxiety, but it only takes a bit of insight to navigate the many ways numbers can mislead us. It boils down to context. We are too often swayed by recent events. We overlook what is invisible yet significant. We struggle to grasp compounding – it’s not instinctive. We evolved in an arithmetic world, so we are unprepared for the exponential math of finance.

5. Market Mayhem: As investors, we often rely on rules of thumb that fail us. We don’t fully understand the importance of long-term societal trends. We view valuation as a snapshot in time instead of recognizing how it evolves over a cycle, driven primarily by changes in investor psychology. Markets possess a duality of rationality and emotion, which can be perplexing; however, once we understand this, volatility and drawdowns become easier to accept.

6. Stock Shocks: Academic research and data overwhelmingly reveal that stock selection and market timing do not work. The vast majority of market gains come from ~1% of all stocks. It’s extremely difficult to identify these stocks in advance and even harder to avoid the other 99% of stocks. Our best strategy is to invest in all of them through a broad index. Some terrible trades are illustrative of this truth.

Bad Behavior:

7. Avoidable Mistakes: Everyone makes investing mistakes, and the wealthy and ultra-wealthy make even bigger ones. We don’t understand the relationship between risk and reward; we fail to see the benefits of diversification. Our unforced errors haunt our returns.

8. Emotional Decision-Making: We make spontaneous decisions for reasons unrelated to our portfolios. We mix politics with investing. We behave emotionally. We focus on outliers while ignoring the mundane. We exist in a happy little bubble of self-delusion, which is only popped in times of panic.

9. Cognitive Deficits: You’re human – unfortunately, that hurts your portfolio. Our brains evolved to keep us alive on the savannah, not to make risk/reward decisions in the capital markets. We are not particularly good at metacognition—the self-evaluation of our own skills. We can be misled by individuals whose skills in one area do not transfer to another. We prefer narratives over data. When facts contradict our beliefs, we tend to ignore those facts and reinforce our ideology. Our brains simply weren’t designed for this.

Good Advice:

10. This is the best advice I can offer:

A. Avoid mistakes (fewer unforced errors, be less stupid).

B. Recognize your advantages (and take advantage of them).

C. Create a financial plan (then stick to it). If you need help, find someone who is a fiduciary to work with.

D. Index (mostly). Own a broad set of low-cost equity indices for the best long-term results.

E Own bonds for income and to offset stock volatility. Primarily

Treasuries, investment-grade corporates, munis, and TIPs.

F. Be tax-aware. Consider direct indexing to reduce capital gains and

reduce concentrated positions.

G. Use a regret minimization strategy when sitting on outsized single position gains.

H. Be skeptical of all but the best alts (VC/PE/HF/PC). If you have access to the top decile, take advantage of it. Otherwise, exercise caution.

I. Spend your money intelligently: Buy time, experiences, and joy. Ignore the scolds.

J. Fail better. Understand what is and is NOT in your control.

K. Get rich: Here are the classic strategies to get rich in the markets, including how difficult each is and their likelihood of success.

~~~

I was just discussing the idea with Morgan Housel and Craig Pierce —  “Is this anything?” and now it is the day it arrives! (Hardcover and ebook are published today; Audible audio version is out tomorrow).

How did that happen so quickly…?

You can order it in your favorite formats in the US, UK, or around the world. If you want to learn more before putting down your hard-earned cash, check this wide array of discussions, podcasts, reviews, and mentions.

This book was a joy to put together, and I have been delighted at the response it has received! Please let me know what you think of it at HNTI at Ritholtz Wealth.

Really Wish I’d Been Wrong

Unfortunately— and I sincerely wish that this was not the case— I was correct when I said this would go badly. Thousands and thousands of government layoffs. Thousands more deported. Funding frozen, military aid frozen, intelligence-sharing with allies frozen. International relations in tatters. The stock market in free fall. Wall Street types are furious, including a number of billionaires who supported President Trump in the election (though Elon musk seems to be enjoying himself) and who gave to both his campaign and his inauguration fund. Congress is racked with fear and won’t speak out— the potential consequences of ‘disloyalty’ to Trump are simply too high. Even some Republican voters are beginning to have doubts about the crazy they’ve wrought. 

The US is breaking global trade norms and destroying decades of trust and relationships. Our allies are pinging between shock, rage, frustration and disgust. Even kind and patient Canada is pissed. Other nations can no longer count on America: not for the import and sale of their goods, not for alliance against bad actors, not for military support. The Trump administration has blown it all up. And as much as it saddens me, this is on us. This is what America asked for.

The latest, as reported by Bloomberg, March 6

On Thursday, Donald Trump signed a few more executive orders. Among the scores he’s churned out since taking office, these were unique, since they partially reversed orders from just two days ago. 

It was the latest backpedal by the White House in the face of furious fallout both at home and abroad to his 25% sanctions against Canada and Mexico. With markets plummeting, automakers yowling and Canada pounding its chest, Trump announced he would exempt some goods from both countries, but only for a month. If that sounds familiar, it’s because this is the second month-long delay Trump granted on his own tariffs.

Today’s announcement came after Trump spoke with Mexican President Claudia Sheinbaum, who has sought to negotiate with the 78-year-old president while Canada Prime Minister Justin Trudeau struck a more strident tone. The Trump administration did take pains to say its other threatened tariffs would move forward as planned in the coming weeks and months, but after weeks of threats, little follow through and now reversals, Wall Street has apparently decided the only safe thing to do is sell. [Highlight mine] The S&P 500 fell to a four-month low. 

If you’re in the market, you’re somewhere between nervous and full-on panicking. I myself have lost around 15% from my portfolio peak on February 18. That’s a big drop, a huge bite out of my retirement. 

But I’m not selling. Haven’t unloaded a single share. My stomach is in knots, I’m sleeping poorly, I’m fearful about my kids’ graduate school plans and my home-buying intentions are in question and some future vacations are hanging by a thread. But I’m not selling.

Why you ask? Because I own some outstanding businesses and there’s nothing wrong with them. What’s happening today, what we can’t stop seeing all around us, is about global trade, is about prices, is about supply/demand and government firings and deportations and interest rates and maybe even the return of inflation or the possibility of a recession. 

But the stocks I own are shares of businesses which are not causing the problem. They might have to adjust prices, they might sell less stuff, might have to layoff employees to maintain margins or cancel product launches or even shutter a division. But they’re responding to market conditions, as they must, and there is simply no reason for me to not own them anymore. They remain good at what they do.

If I sell now, into a sliding market, after all the gains I’ve made in the last few years, I’ll still have to pay capital gains taxes on those gains— so that’s 20-35% tax on top of the 15% losses of the last few weeks. 

Then I’ll have a (smaller) pile of cash that earns me nothing. Sure it won’t keep falling, evaporating value. But what do I do with that cash? I can’t spend it— that’s my retirement fund. I can’t stash it in my mattress because inflation will eat it up over time. 

I would want to buy back into the markets ‘when they reach the bottom’ of this selloff. Which is … when? How will I know when we’re at the bottom? When will I feel it’s safe to get back in? Likelihood is I won’t trust that if I start buying, it won’t all drop again tomorrow. I’d be late in my selling, and I’d almost surely be late buying it all back. Combined, those will crush my long term returns. 

Plus I have learned to be disciplined about selling. There are only four good reasons to sell. As scary and disheartening as all this is, the mess we’re in triggers none of those reasons.

So all I can do, really, is guzzle some Pepto Bismol and leave it in play. Gut it out. Remember, if you’re fairly diversified (or if you primarily own broad ETFs like the entire S&P 500, etc) then things will improve again. Everything we’re watching in the markets is short term awfulness. 

You’re a long term investor. You own stocks because over years and decades, they appreciate faster than any other asset class. But quite literally, the price for that appreciation is volatility; it’s called the ‘risk premium’— you get paid more for taking that extra risk. That’s where we are right now: the Volatility. 

Stop watching your portfolio fall. Look away. And wait it out. 

Reach out with your thoughts, I’d love to hear: robin@zagaco.com