Borrowing 30 Years of Investment Experience from Barry Ritholtz
Updated: Aug 12
Reading books and listening to long-form podcasts can create a tremendous amount of leverage on your time.
When a subject-matter expert distills 30 years of lessons learned on the job into a 300-page book or a two-hour interview, you’re able to ingest a disproportionate amount of experience relative to the time you commit.
Investing legend Barry Ritholtz released a book earlier this year, How Not to Invest, and sat down with the hosts of the Rational Reminder podcast to discuss some of the most impactful insights he’s accumulated over the course of his career.
If you have eight to ten hours, I truly recommend reading the book. An hour in the car or on the treadmill can be dedicated to the podcast. But if you only have five minutes, I’ll summarize and paraphrase some of my biggest takeaways below.
This article summarizes and comments on selected ideas from Barry Ritholtz’s book How Not to Invest and his appearance on the Rational Reminder podcast. Readers should review the original sources for the full context. The views attributed to Mr. Ritholtz are his own. Chagrin Valley Legacy Advisors is not affiliated with Mr. Ritholtz, Ritholtz Wealth Management, the book’s publisher, or the Rational Reminder podcast, and their inclusion does not constitute an endorsement of Chagrin Valley Legacy Advisors. Chagrin Valley Legacy Advisors received no compensation for discussing these materials.
Forecasting, Expertise, and Uncertainty
Being successful in one domain doesn’t necessarily make someone a good forecaster in another.
Billionaires are particularly susceptible to the “halo effect.” We assume that because someone built a great company, they must also understand markets, economics, politics, or whatever else they happen to be discussing.
Closer to home, we may be more inclined to take a stock tip or invest in a private deal or piece of real estate alongside a wealthy friend because we assume their financial success means they’re good at placing winning bets.
Experts are generally much better at explaining the present than predicting the future.
A true expert can explain what’s happening, why it’s happening, historical precedents, what’s unusual, and which details actually matter.
That knowledge is enormously valuable even if they can’t tell you what happens next.
You may know you’re talking to a real expert when their answers start to frustrate you.
They qualify predictions, discuss probabilities, explain what could make them wrong, and resist giving you the definitive answer you want.
Humility about the future is often a sign of expertise, not a lack of it.
Never confuse a model with reality.
As statistician George Box famously put it: “All models are wrong, but some are useful.”
Models can help us understand reality without being capable of perfectly predicting it.
Bad Financial Advice
Emotional appeals should be an immediate red flag.
Fear, greed, FOMO, and urgency are frequently signs that someone is selling rather than analyzing.
Understand someone’s incentives before evaluating their recommendation.
How are they compensated? What happens to them financially if you say yes? What happens if you say no?
“90% of everything is crap.”
Ritholtz applies Sturgeon’s Law to finance: most financial products aren’t particularly useful.
Complexity isn’t inherently bad, but the hurdle for adding it to a portfolio should be high. It should solve an identifiable problem.
Financial Media
There’s a fundamental mismatch between the time horizon of financial media and the time horizon of an investor.
The news cycle operates by the minute. A financial plan may operate over 30, 40, or 50 years.
Financial news can actually have negative value for long-term investors.
It encourages action when inaction may produce the better outcome.
There has to be something new to talk about every day. There doesn’t have to be something new to do with your portfolio every day.
Short-form social media makes the problem worse.
Algorithms tend to reward confidence, outrage, fear, and extreme opinions—not nuance and uncertainty.
Don’t take financial advice from strangers without understanding their methodology, incentives, experience, and track record.
Rather than distrusting everything, build a curated network of trusted information sources and continually reevaluate them.
Lengthen your information time horizon.
Books > podcasts > articles > television > social media.
Generally speaking, the shorter the format, the less room there is for context and nuance.
Cognitive Biases
Denominator blindness: dramatic numbers are meaningless without context.
Risk should always be considered relative to the relevant denominator.
Ritholtz uses the example of the summer Jaws was released. Beaches emptied as people became terrified of shark attacks even though the probability of actually being attacked by a shark was extraordinarily small.
The numerator was scary. The denominator was ignored.
Survivorship bias causes us to disproportionately study winners.
We see the successful entrepreneur, fund manager, stock, collectible, or investment strategy.
We don’t see the enormous graveyard of failures that produced those winners.
Media compounds the problem because winners are disproportionately visible.
Humans don’t intuitively understand compounding.
Most of everyday life is linear. Investment growth is exponential.
That makes decades of compounding surprisingly difficult to conceptualize—and long-term investment strategies surprisingly difficult to stick with.
The early years can feel boring. The later years are where the math becomes extraordinary. You have to survive the boring part to get there.
Market Timing
Knowing whether you’re in a secular bull or bear market can be psychologically helpful, but it isn’t particularly useful as a timing tool.
Market cycles generally become obvious in hindsight, which makes trading around their beginnings and endings extraordinarily difficult.
Bull markets can last much longer than investors expect. Bear markets eventually end.
The practical lesson is persistent investment through both, when possible.
Valuation matters, but valuation is not a timing tool.
Historically, starting valuations have sometimes been associated with longer-term returns, but valuations have not reliably identified short-term market turning points.
Neither tells you when those returns will materialize.
“Stocks are expensive” is not, by itself, a sufficient reason to avoid stocks.
Expensive markets can become more expensive. Cheap markets can become cheaper.
External shocks frequently cause markets to wobble before eventually resuming their underlying trend.
A geopolitical event matters financially primarily to the extent that it ultimately affects corporate earnings and economic activity—not simply because the event itself is emotionally significant.
Emotionally powerful events can produce emotional investment decisions.
The emotion eventually disappears. The investment decision remains.
Large external shocks can also produce enormous policy responses.
The sample size is obviously small, but WWII and COVID are two examples where enormous fiscal responses contributed to inflation while markets ultimately experienced powerful rallies.
The initial event and eventual market outcome weren’t necessarily intuitive.
Behavioral Mistakes That Destroy Portfolios
Not having a written plan.
Without one, every major market event becomes an opportunity to reconsider the strategy.
Misunderstanding your own risk tolerance or risk capacity.
The amount of risk you’re emotionally comfortable taking and the amount of risk your financial situation allows you to take aren’t necessarily the same.
Excessive concentration.
The asset that created your wealth doesn’t necessarily need to remain the asset responsible for preserving it.
Ignoring fees.
Ignoring taxes.
Overconfidence.
Knowing the limits of your own knowledge is an investment advantage.
Successful investing may have less to do with finding brilliant investments than avoiding a handful of major, preventable mistakes.
Sudden Wealth
Receiving $50 million doesn’t magically give someone the knowledge required to manage $50 million.
It doesn’t matter whether the money comes from selling a business, receiving an inheritance, or some other windfall.
The skills required to create wealth can be completely different from the skills required to manage it.
A successful entrepreneur may have spent decades becoming exceptional at operating a business.
There’s no reason they should simultaneously have become experts in portfolio management, income taxes, estate planning, trusts, charitable planning, or multigenerational wealth.
New wealth creates unfamiliar financial problems.
Taxes become more complicated.
Cash-flow decisions change.
Estate planning becomes more consequential.
Investment mistakes have more zeros attached to them.
New wealth can create social risks, too.
Scams, friends and family asking for money, and a seemingly endless stream of people pitching investment opportunities.
The larger the fortune, the greater the potential value of expertise surrounding it.
You don’t necessarily need a giant family-office apparatus.
But you should deliberately build a team capable of handling problems you previously didn’t have.
What Makes a Good Financial Advisor
A good advisor’s value extends far beyond picking investments.
Ritholtz calls this “organizational alpha”: creating the plan, maintaining discipline, coordinating the different pieces of a financial life, and preventing behavioral mistakes.
Look for track record, process, and temperament.
Investment philosophy matters, but so does how someone behaves when markets, clients, and headlines are all telling them to panic.
Interview multiple advisors and evaluate both technical competence and personal fit.
This is someone you may be calling during some of the most consequential and stressful financial moments of your life.
Proactive communication is a core competency, not a “nice to have.”
Good communication before a crisis helps investors make better decisions during one.
Good advisors should be willing to publicly articulate how they think.
Writing, podcasting, and other long-form communication allow clients and prospective clients to understand an advisor’s philosophy before that philosophy is put to the test.
Money, Spending, and Purpose
Money without purpose has a tendency to disappear.
Wealth should ultimately be attached to something: independence, family, philanthropy, experiences, security, or whatever else matters to you.
The purpose of the money should determine the appropriate amount of risk—not the other way around.
Start with what the money needs to accomplish, then build the investment strategy around it.
Financial success shouldn’t be defined by achieving the highest possible portfolio value.
Freedom matters.
Opportunity matters.
Optionality matters.
The purpose of accumulating wealth should ultimately be to reduce financial stress and improve your ability to live the life you want.
Turning wealth into another scoreboard largely defeats the purpose.
A surprisingly common problem among successful accumulators is eventually learning how to spend their money.
The behaviors that help someone accumulate wealth aren’t always the same behaviors that allow them to enjoy it.
Frugality isn’t automatically virtuous.
Spending more can be perfectly rational when you’re purchasing time, safety, convenience, or meaningful experiences.
The Bigger Lesson
Successful investing rarely requires knowing exactly what happens next.
It requires humility about what you don’t know, skepticism toward people who claim they do, and a process for making decisions under uncertainty.
The investment industry naturally gravitates toward products, predictions, and performance because those things are easier to sell.
Over a lifetime, diversification, taxes, fees, behavior, patience, and planning may be far more consequential.
You don’t necessarily need to become brilliant at investing.
You need to become consistently difficult to fool—including by yourself.
This material is provided by Chagrin Valley Legacy Advisors for general informational and educational purposes only. It reflects the author’s interpretation of the cited materials as of the publication date and may omit information or context contained in the original sources. References to third parties do not constitute an endorsement, recommendation, or affiliation.
Nothing in this material constitutes personalized investment, legal, tax, or accounting advice; an offer to sell; a solicitation to buy; or a recommendation regarding any security, investment product, or investment strategy. The observations discussed may not be appropriate for every investor. Investment decisions should be based on an investor’s particular objectives, financial circumstances, time horizon, liquidity needs, and tolerance for risk.
All investments involve risk, including possible loss of principal. Diversification and asset allocation do not ensure a profit or protect against loss. Past performance and historical market behavior do not guarantee future results. Examples involving market events or investment concepts are illustrative and should not be interpreted as forecasts.
Advisory services are offered through Chagrin Valley Legacy Advisors, LLC, a registered investment adviser. Registration does not imply a particular level of skill, training, or approval by any regulator. Please consult appropriately qualified professionals concerning your individual circumstances.
