How Not to Invest: Avoiding Common Mistakes and Dangerous Financial Advice with Barry Ritholtz (EP.210)

0:28We all need to make smart decisions with our money. picture blog, host of the wildly popular Masters in Business podcast, and author of the wonderful new book, How Not to Invest. Barry is widely known for his thoughtful critiques on common financial advice, forecasts, and investing myths. And in this episode, we dig deeper into his philosophy, the pitfalls investors commonly face, and practical strategies for making better decisions as an investor. As always, you can find detailed show notes by visiting thelongterminvestor.com, but also be sure to check at the top of this episode's description a link to sign up for updates about my new book that will be coming out in 2026.

1:10And now, please enjoy my conversation with Barry Ritholtz. Welcome to The Long-Term Investor. Today, I have with me the founder and chief investment Officer of Ritholtz Wealth Management, author of the Big Picture blog, and more importantly, the new book, How Not to Invest. Barry Ritholtz, welcome to the show. Thank you so much for having me. I think I've told you this in person. You are probably the person most responsible for me wanting to start a blog and then subsequently wanting to start a podcast. You've written thousands of articles. You've recorded hundreds of podcasts. You were really one of the first people to have a big podcast.

1:52For those of you listening or watching, if you don't subscribe to Masters in Business, absolutely the best out there. You're a tremendous interviewer. And so I want to start pretty high level. Share with us a little bit, how did you develop your investment philosophy over time? A lot of it is trial and error. A lot of it is reading. A lot of it was just, you know, you're young. I learned over time that we as human beings are social primates who evolved and adapted to be cooperative. So we tend to believe the sort of that comes our way because for the past 2 million years, other than the past couple of hundred, we are soft, chewy, delicious creatures without armor, fangs, or claws.

2:36The only way we've survived as a species is as an intelligent, cooperative social group. So someone's always at the edge of the pack of chimpanzees warning about leopards, and that's hardwired into our, unless you want to call it softwired into our wetware, we tend to believe stuff we hear. And so being kind of gullible and naive and listening to quarterly calls where the CEO or CFO talks about, oh no, this quarter is just an aberration. We see the orders, we have clarity the next quarter, it's all great. And you kind of figure out, oh, everybody is selling you something, if you don't at least ask the question, do they have my best interest at heart?

3:19What are they pushing? You kind of leave yourself vulnerable to a lot of nonsense. And so all of the columns were just kind of exploring that the podcast was trying to learn more as opposed to the sort of nonsense we hear on a lot of TV or radio. What's your favorite stock? When's the Fed going to cut? Where's the Dow going to be in a year? So everything evolved over time Some of it was trial and error. Some of it was just, hey, wait a second. Let's go back to first principles. Why are we doing it this way? And when you do that, you kind of learn that a lot of it is just nonsense. You mentioned nonsense.

3:58And a big topic within the book was just the fact that predictions and the experts who make these forecasts are just such a big part of the financial ecosystem. And I think most people of any intelligence level would agree, nobody can predict the future. But as you put in the book, I think it's, quote, nobody knows anything. People just seem to gravitate towards prediction in finance more than anywhere else. Why is that? So there's three bullet points on this, why we believe people, some of the dumb things we believe. But just roll back a little bit and think about, I'll share a quick anecdote that's not in the book.

4:36So a buddy of mine used to do, back in the day, the business week would have a year ahead forecast and every strategist and economist on Wall Street would predict the S &P, the NASDAQ, the Dow, interest rates, the 10-year bond inflation, the price of oil, things like that. And a buddy was sort of on a garden leave between firms and didn't feel comfortable doing it without the protection of a firm. So he asked me if I wanted to. And I had just written a piece called The Folly of Forecast that looked at whatever annual forecast you look at, it's always a different winner each year. You would think if there was some skill set, hey, Michael Jordan and the Bulls won six NBA finals, maybe there's some skill involved.

5:22But if it's completely random, perhaps it's more luck. So he introduces me to the editor of This Was Business Week Before Bloomberg Bought It. And I give her this pitch, hey, how about some alternative programming and why you need to take these predictions with a grain of salt and why you should never marry your portfolio to any one forecast. And I'll never forget this editor says to me, look, it's a big double issue. We sell a ton of advertising. Do you want to participate or not? And I had just done an analysis of the Dow based on Reinhart and Rogoff, who said leverage-based credit crises lead to a 32 % drop in real estate.

6:06And so based on that, at the time the Dow was 13 ,000, 14 ,000, I said, if their analysis is right, we could see, last paragraph, we could see Dow 6 ,800. The whole thing was all about risk and how real estate-driven the economy in the 2000s were and how abnormal it was. It wasn't a forecast. It was strictly, let's war game a range of possibilities. And no one wants to talk about the analysis. All they wanted to talk about was Dow 6800. I think that was like the end of 06. So throughout 07, I'm the idiot with Dow 6800. And then suddenly by the beginning of 2008, I had been doing Kudlow and Kramer once or so a month, which became once a week, which became twice a week, which became constant.

6:53And suddenly, that guy Ritholtz is a little bit less of an asshole than we thought. But just stop and think about what that means. First, it tells us that people are really hungry for specific forecasts, right? If I go on TV and take the other position, hey, listen, a year ahead is so far out and so random. No one had a global pandemic closing the economy down in December 2019 in their year ahead. Oh, and the market would rally 69 % off of the lows in 2020 and do 28 % the following year. Nobody had the Russian invasion of Ukraine or the Gaza-Israeli War, any of those things. Every year, 12 months is so long that a random event will easily disrupt the best intention forecast.

7:40And so when you say that to an audience, so let's assume the average return 9%, 10 % a year, plus or minus with dividends reinvested. We're at 5 ,000. All right, 5 ,500 next year, plus or minus, right? So they say, thanks. And then they go to the other guy and say, what do you think? Well, I think the Dow is going to end up at 5327.5. And here's why. The audience loves that. The more specific, the better. Think about us in caves and let's go get that woolly mammoth, and here's what we're going to do. We're going to go down and where people want leadership. They want specificity. Nobody wants to believe that the universe is random, or at least filled with random events.

8:26We hate that. And so they want the specific guy, 53, 27.5, the old joke about economists. Why do they use decimal points? To show they have a sense of humor because it's so ridiculous, but we want that specificity. And by the way, if the person speaking happened to have had a huge outlier in their career and got one right, think about people like Michael Burry. There's a handful of other guys who were right once in their career, and now they just keep going back to that well. By the way, Burry doesn't trade that way. That was just how he spoke about risk. He's still a fantastic investor, but don't pay attention to his tweets.

9:08They're not going to make you money. The same is true for all these other guys, Sam Zell and Robert Kiyosaki and Nuri Rubini and all these people who've had these outlier forecasts. They're more likely to be believed by the audience and they're more likely to be wrong. So it's just human nature. The more specific, the better. The greater the outlier, the better. And all of those add up to a really terrible track record. Well, let me dig in there a little bit. You just named some people who tend to draw headlines and individual investors, even advisors, will sometimes overweight the opinion when they see a Robert Kiyosaki you mentioned or a Tony Robbins or a Dave Ramsey.

9:49These celebrities or these financial gurus, so to speak, often have extreme views. What red flag should investors be looking for to identify potentially harmful financial advice when looking at experts? So the first one is the word guru. I'm going to quote Bill Bernstein, who gets a chapter in the book. We use the word guru because charlatan is too difficult to spell. And I don't think all those guys are charlatans. I think, though, that we should really have our guard up. I mentioned Sam Zell. He made all his money in real estate. By solid assets, deeply distressed, it had nothing to do with timing recession.

10:28Kiyosaki wrote what is arguably the bestselling book in all of finance, Rich Dad, Poor Dad, 32 million copies, some insane number. Someone else on another research shop has put together every forecast he's tweeted over the past 15 years since 2009. He's been nothing but wrong. I don't mean a little wrong. I mean like, oh my God, this guy is burning cash by the ton. My favorite is probably 2018. Now is not the time to buy US real estate. Other than the depths of the financial crisis, 2018 was a fantastic time to buy US residential real estate. He's been forecasting a crash. He's been forecasting all sorts of stuff.

11:10And he's got like, I don't know, 3 million followers. That means there are 3 million people who don't know a whole lot about what's going on in the world. But as the head of my trading desk used to say, can't save everybody, someone's got to be on the wrong side of the trade. And that's really harsh, but it's true. And so, plus, don't forget, the media is not a public service. It's a business. So clickbait, I mean, how many New York Times headlines have you seen with the same clickbait format? that. I'm an oncologist or I'm a this or I'm a that. Here's why you need to do that. I just saw one. I'm an oncologist.

11:47Here are the 13 things you can do to reduce your chance of getting cancer. It's like, holy, that's a really powerful piece of clickbait. And then I started noticing it coming up again and again. And one of the things that as someone who's published over the years, Street.com, Washington Post, Barron's, and most recently Bloomberg, you learn the headlines are written by an editor. You can submit a thousand word column. Someone else is going to muck it up with a clickbaity headline and suddenly you look like an idiot. But that's just the nature of it. The editor writing the headline is one of the most important lessons I learned when contributing for the Wall Street Journal on a weekly basis.

12:27They want the clicks. And I think, yes, the media is not on our side. You know who I also don't think is on our side, and you are uniquely positioned to chime in on this, are the billionaires who are often in the media. You have interviewed, I don't know, several dozen billionaires on your podcast. Quite a few. And I just keep saying, just give me one tenth of 1 % of your money. I will take care of it. Don't we all feel that way? Well, this is a slightly different group of people who would be the gurus or the charlatans. I think in general, they mean well, but their situation is so different. So I want to ask you, someone who's had deep, thoughtful conversations with a number of not just billionaires, but wildly successful investment managers.

13:11When you see an insight or a soundbite from one of these people in the media and you are an individual investor, or again, if you're a financial advisor, how are you thinking? What questions are you asking in your mind to help interpret the information that they're putting out there in the world? Two things come to mind about that. The first is I was surprised how many billionaires talk to me about the luck and serendipity in their lives, which the first time someone gives you that, it kind of smells like, oh, this guy's blowing smoke up my behind. But after you hear it from Howard Marks and Ray Dalio and Lee Cooperman and over and over, I'll never forget, I had a conversation with Howard Marks on the podcast.

13:50He's been on the podcast half a dozen times. Scott Galloway is another one. And Howard brings it up. I'm like, Howard, not for nothing. You went to undergraduate here. You were a star at the Columbia Business School. You launched this fund. You launched a special distressed asset fund in the heart of the financial crisis. That's not just luck. That's skill. That's hard work. And he said, I went to Columbia Business School with Mario Gabelli, Lee Cooperman, Art Sandberg. His carpool is just insane. He said, everybody who was there was smarter than me. We all worked super hard. I wasn't outworking any of them.

14:29But sometimes right place, right time, right opportunity, not everybody gets that. And there's no doubt that that's true. So that's number one. The second thing that kind of comes along is the role of humility and constantly having to check yourself. And I am probably not the right spokesperson for the art of being humble because my own neurodeficits and overcompensation for being an introvert in high school have led to this whole other persona, which my close friends know is nonsense. But it's fascinating to hear this over and over again. David Dunning of Dunning-Kruger, professor at University of Michigan, psychology professor, and really just helped drive the behavioral finance field forward, said, if you're not looking back at your work every two, three, four years and don't think, wow, this is a piece of I wrote five years ago.

15:29You're not progressing. And here's a guy who's got this entire subfield of behavioral economics named after him, the Dunning-Kruger effect. And even he is saying, hey, your work five years ago should be crap because you should be getting better and better. That's incredibly humbling to turn around and say, all right, I guess maybe I kind of blame the whole Wall Street training program, which is about a week of modern portfolio theory and asset allocation. And here's how to build a bond ladder. And so after that week, it's 51 weeks of sales training. And a big part of sales training is just fake it till you make it.

16:09when I was coming up in the 90s, every jackass retail stockbroker I knew had a Rolex Submariner. And I'm a longstanding watch guy from my Snoopy Timex to nicer watches, but I've always detested the sub because it just reminds me of every hard selling, fake it till you make it sort of guy. I think it was part of the sales training. Go buy yourself a flashy looking watch, even if it's the cheapest Rolex because that's the persona you want to project. And so that's led a lot of people to forget, hey, it's okay to say, I don't know. It's okay to say, I don't have this information at my fingertips, but I'll circle back with you over the next 24 hours because someone in my firm could get you this tax information, this stock information, this allocation question.

17:02Whatever it is, we have access to the answers, but I'm not just going to spit something out. And it always seems to surprise people when you say that, oh, I don't have all the answers in my fingertip. We have a huge resource team and a lot of resources. Let me get you the precise right answer as opposed to an approximately wrong one. I really appreciate you saying that, Barry. So as chief investment officer of my firm, we're a large firm like yours, and I'm often concerned about advisors making up a response or wanting to sound confident, I think there's no more sign of your self-confidence when you're willing to say, I don't know, but let me get you that information.

17:44You even mentioned in the book, at some point, I think, learning to say, I don't know, is a superpower. I mean, let's dig in a little bit more there. Why is that? And how do you get better at it? There's a couple of things that are sort of adjacent to it, but my favorite example is, two examples, really. One is Enron, the other is Theranos. So Enron, you have an analyst during a quarterly conference call being told he's stupid because he didn't understand the business model and what sort of a question is that. And really, when you see an answer like that, it means you've hit a nerve and they're hiding fraud or something else, which is what was actually happening.

18:25So that guy, listen, I went to a state school. I didn't get an MBA, but that guy was like Yale undergraduate, a Wharton MBA, not exactly a dummy. And so if Jeff Skilling is calling him, you must be an idiot if you're asking a question like that, red flags everywhere. That's a yellow card at the very least. And just like, wait, you don't like my question? As it turned out, what Enron was doing and other companies had dabbled in this, is they would book like a 10-year contract. Then they would realize all of the revenue in year one, which is really not a lot. It just sends you off on this insane pyramid.

19:07The question they asked, not only did it get a terrible response, but it kind of accurately implied, hey, you guys are full of shit. This is a fraud. Theranos is even better. There's two things about Theranos, the blood testing company, that rather than draw a needle from a vein, we just do a little stick that all the medical professionals say, hey, when you do a pin stick, you're getting interstitial fluids. It's not a clean read. There's a reason we do a venal draw as opposed to, and I have no medical background whatsoever, and I kind of understood that. I mean, I don't know any of this other than because of that story.

19:43I would have never known without it. Again, a couple of yellow cards and you got yourself a red card. You're out of the soccer game. First, you have people like Henry Kissinger on the board of directors of Theranos. Well, I understand he's a big, important former secretary of state slash war criminal, but what's his expertise in biotechnology, medical devices, healthcare, et cetera. Oh, and PS, every VC that practiced in those spaces took a hard pass. So all the writing was there and you're suing the Wall Street Journal because they're talking about this. Hey, another red flag. I interviewed the guy who wrote the book, Bad Blood, Wall Street Journal reporter, John Carreyrou, I think it is.

20:25I love the book so much and the interview was so great that before that interview came out, I wrote a book review for Bloomberg and it published on like a Thursday or Friday. And I remember getting a phone call from the editor. Hey, we just got a nasty, threatening letter from, what's his name, the attorney that was also on the board of directors and owned stock in the company from Cravath. And then he went and opened his own law firm, America's Most Feared Litigator. I was traumatized for about 30 seconds and I can't remember his name, but I'm going to punch in Theranos and it'll come out. David Boyce.

21:06There you go. I get this crazy phone call from the editor and I freak out for about 30 seconds and I'm like, wait a second. I don't know anything about Theranos. It all comes straight from months and months of, I think he won a bunch of awards, maybe even the Pulitzer for that series. Everything came from the book and the columns. So I now take David Boyce's letter, which, oh, it's in the other office. So I have a two page letter from him. I respond to the letter to the head of Bloomberg Legal Council and the editor literally line by line annotate page 47, page 123 page. And so the general counsel from Bloomberg sends a response back to David Boies.

21:48That is the funniest legal letter you've ever seen. Short a version. You are a schmuck. Come sue us. We will mop the floor with you. It was hilarious. And sorry, your problem is with the Wall Street Journal. All we're doing is reporting on the book, reporting on what the Wall Street Journal said. But if you want to sue us, bring it. It's just one of those things that, wow, this level of aggressiveness in defending what should be pretty straightforward quotes, you want my cash and you're not going to answer questions. There are 3 ,500 stocks. There are millions of small private companies and countless funds.

22:29Anybody who disrespects you in that way, move along. There's just no reason to waste your time or capital with someone who is going to challenge you because you're asking questions. And so on the one hand, you have to just be intellectually confident enough that you're asking good questions. Doesn't mean you blow into a shareholders meeting having done no homework and start asking dumb questions that are in the 10 K's or whatever. But if you're like knowledgeable and you've done your homework and you ask a question and someone answers in a way that makes you uncomfortable, there are a lot of places where your capital will be welcome.

23:09This is not one of them. Everything just for our listeners, for our viewers, all these resources that Barry is mentioning, I'll be sure to link to in the show notes at the long-term investor.com. If you're watching us on Cheddar, be sure to subscribe to the podcast, subscribe to the YouTube channel. We're talking about a lot of the ideas that you can grab from Barry's new book and talking about that book, How Not to Invest. I mean, a central theme of the book is inversion. I mean, it's even in the book's title. So talk to me a little bit about why inverting is so important and how you apply it throughout your life in investment decisions.

23:45So Bailout Nation comes out in the summer of 2009. And then we launched a firm in 2013, which was about a year or two work in prep. And I had a bunch of people pushing me, hey, it's time for another book. And my answer was, I'm kind of busy. And besides, there have been tens of thousands of how to invest books over the past, I don't know, century. Most people are still pretty mediocre investors. I don't think the books are getting it done. I kind of held everyone at bay for a while. And then during the pandemic, I don't know if you could see this on my wall is a giant bulletin board. And I literally just started writing chapter title after chapter title.

24:26I ended up with 100 really short chapters. Most are a page or two, three at most. There's one or two chapters that are a little longer, six, eight pages in the middle and a lot of charts and tables. And as I started putting pen to paper, just thinking about it, I don't want to say it's self-organized, but how not to invest quickly became three broad topics, each about a third of the book, bad ideas, bad numbers, bad behaviors. And then the last, I don't know, 5%, 10 % of the book is, okay, I've told you everything what not to do. Here are a couple of things you probably should do. And I mean, that is really, I don't want to say an afterthought, but you just can't be relentlessly negative for 350 pages.

25:12You got to give people a little something. And so the idea that it kind of teaching people what to do isn't working. So let's at least show them don't do these things. I dedicate the book to a couple of Charlies. Charlie Munger, in the most Charlie Munger way was once asked, are you and Warren Buffett just smarter than everybody else at Berkshire Hathaway? And of course, Munger says, it's not that we were smarter than everybody else. We're just less stupid, which is a pretty hilarious sort of Munger approach, but it's true. And then Charlie Ellis, who was Rand Greenwich Associates, the chairman of the Yale Endowment, board of directors of Vanguard.

25:55And Ellis sort of compares tennis to investing, where the professional score aces hit with power accuracy, spin. They win by scoring points. The other 99.9 % of us, we just make an endless number of unforced errors. We double fault on serves, we hit it long, we hit it wide, we hit it into the net, we hit it right into our opponent's sweet spot. That's how you lose through unforced errors. And investing is the same. Hey, forget trying to pick the next NVIDIA. Just make less mistakes. You're way ahead of 90 % of your peers. If being in the top decile doesn't appeal to you, what do you think you're going to do?

26:37Yeah, I love Charlie's book, Winning the Loser's Game. He was actually on the show. For those of you listening, if you want to scroll back to episode 191, Charlie was on the show not all that long ago and amazing how much fire he still brings to the table with these conversations. 80 something, 84, he's still cranking out books. Yeah. He had a new one this year, Rethinking Investing. By the way, 87. I'm wrong, not 84, 87. Pretty amazing. And writing the forward of that is Burton Malkiel, who's 90 something. And we're all really fortunate to have been standing on the shoulders of giants. As you mentioned, there's a lot of books already on how to invest.

27:17You inverted that and say, okay, how do you not invest? There aren't that many original ideas anymore. I think the other thing is that generally speaking, perhaps where I feel like the literature has expanded the most is the importance of emotional self-awareness for investors. You do a great job of covering this topic. do you mind just sharing any specific example or strategies for how investors can practically identify and control their emotional impulses, whether it's during market turmoil or periods of excess and exuberance? One of my favorite little aha moments came from Laszlo Barigny, who's no longer with us, passed away a year or two ago.

27:59His shop used to put out, and you could create this on your own, but his shop used to put out quarterly and annual sort of just compendiums of various important, in quote, news stories. Headlines, Washington Post, Wall Street Journal, New York Times, just array of stuff. It was just a headline and a handful of paragraphs. It was page after page of this. And what's fascinating is when you look at news when it's old, it's not that it was inaccurate. I think people misunderstand what's going on. It's that you know how the movie ends. You know who wins the game. And so when you go back and reread these stories six months, a year, five years later, all that comes through are those shrieking emotional headlines that operate to throw you off of your chill, for lack of a better word.