Barry Ritholtz, co-founder and chief investment officer of Ritholtz Wealth Management and a longtime adviser, digs into the things that have made him “less stupid” in his latest book.
“How Not to Invest: The Ideas, Numbers, and Behaviors That Destroy Wealth — and How to Avoid Them” isn’t a navel-gazing reveal of his savvy investing philosophy, but rather a playbook on the theme that steering clear of errors is much more important than scoring wins.
I asked Barry to share the mistakes that trip most of us up and what we can do about it. Below are excerpts of our conversation, edited for length and clarity.
Kerry Hannon: Why are most of us better off sticking to a simple investing strategy?
Barry Ritholtz: Historically, simple beats complex. If you’re going to make something more complicated, there has to be an absolutely compelling reason. The more complicated things are, there are more things to break. Think about how much money has been attracted to Vanguard and Blackstone’s core indexing because it’s simple and it works.
What are some of the pitfalls of building long-term wealth?
The biggest single pitfall is our tendency to interfere with the markets’ compounding.
When I ask people, what is a thousand dollars invested a century ago worth today? They say, oh, a million dollars, $2 million. When you tell them it’s $32 million, their heads explode. It’s shocking to people. But that’s the power of compounding.
Please try not to get in the way of your own money compounding. It’s the single best thing you can do.
What are other common mistakes investors make?
The more active you are, the more transactions you engage in, and the worse you tend to do because you’re just creating more opportunities to be wrong.
And we believe a lot of nonsense. Some of it is just myths that get repeated from generation to generation or ping around trading desks. I always laugh whenever I flip on TV and the market is down 2% and someone says, markets hate uncertainty. Do they really? Because there’s got to be a buyer and a seller. That means that there’s a disagreement as to the value of that asset.
We are wildly overconfident in our abilities to do things that the professionals can’t do. You know, no one would say to themselves, yeah, I could play Michael Jordan one-on-one in basketball. Nobody thinks that way.
But when you step into the marketplace, you imagine that you’re going to beat the house, that you’re going to beat Michael Jordan. But trust me, you’re not. Something like half of all the trades are done by institutions — highly qualified, deeply motivated with the latest, greatest, fastest tools. To imagine that you’re going to step in and beat them on their home fields is just another mistake.
