The Billionaire Blunders: What Barry Ritholtz's 'How Not to Invest' Teaches Us About Making Money
Thoughts about the book of my upcoming Talking Billions podcast guest
About the author of the book: Barry Ritholtz is founder of Ritholtz Wealth Management overseeing $5 billion in assets and author of the new book "How Not to Invest," who has spent decades helping investors avoid costly mistakes through his Masters in Business podcast, influential blog The Big Picture, and his contrarian insights.
In the crowded field of investment advice, Barry Ritholtz's "How Not to Invest: The ideas, numbers, and behavior that destroy wealth—and how to avoid them" stands out with a refreshing premise: success in investing comes not from brilliance, but from avoiding stupidity. This approach, inspired by Charlie Munger's wisdom that "it's remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent," forms the foundation of Ritholtz's practical guide to wealth preservation and growth.
The Power of Avoiding Mistakes
The book's central thesis is counterintuitive yet powerful: "Avoiding errors is more important than scoring wins." Ritholtz repeatedly emphasizes that reducing mistakes yields better investment outcomes than chasing spectacular gains. "Make fewer errors, make more money," he states simply, presenting investment success as primarily a game of elimination rather than selection.
This philosophy directly challenges Wall Street's traditional focus on finding the next big winner. Instead, Ritholtz suggests that consistent, average performance—avoiding the pitfalls that devastate returns—is the more reliable path to outperformance. "By finishing in the middle among managers year after year and avoiding common mistakes, you will gradually work your way into the top quartile of all performers," he writes, noting that "average performance turns into outperformance over time."
The Fallibility of Forecasts
One of the most persistent investment mistakes Ritholtz identifies is paying attention to economic and market forecasts. He states bluntly: "All forecasting is marketing, plain and simple." The book systematically dismantles the value of predictions, reminding readers that "the future is both unknown and unknowable."
Forecasting fails, Ritholtz argues, because markets are "nonlinear and also have a high degree of instability." Every factor affects every other factor in the system, creating complex, unpredictable outcomes. Add human psychology to this dynamic system, and accurate prediction becomes virtually impossible. As Ritholtz quotes Richard Feynman: "Imagine how much harder physics would be if electrons had feelings."
The Media Machine and Mental Models
The book offers a scathing critique of financial media, demonstrating how it shapes and distorts investment decisions. Ritholtz, himself a media figure, acknowledges that "to become a better investor, you need to do more than eliminate bad ideas and misinformation; you must also be aware of your emotional state."
He explains why media is problematic for investors: "News is hardly new. It is backward-looking, informing you as to what has already happened. Investing is about what is going to happen." This temporal mismatch makes most financial news irrelevant or even harmful to investment decisions.
Ritholtz emphasizes that all investors operate within mental models rather than objective reality: "We don't live in objective reality; in truth, we function in a model of our own construction." These models can be dangerously flawed, especially when reinforced by media narratives and emotional responses to market events.
The Mathematics of Investing
Ritholtz tackles several mathematical misunderstandings that plague investors. He dismisses the common claim that "the dollar has lost 96% of its purchasing power over the last century" as "the most misleading claim in all of finance," explaining that currency is "primarily a medium of exchange, not a store of value."
The book highlights the power of long-term investing through compounding. If an ancestor had invested $1,000 in equities a century ago, "that small fortune has grown to an enormous one, now worth over $30 million." This exponential growth underscores the importance of patience and perspective in investment success.
Ritholtz also addresses "denominator blindness"—failing to contextualize numbers properly. Whether discussing market drops, layoffs, or inflation, he shows how raw numbers without proper context lead to poor decision-making.
Concentration vs. Diversification
Throughout the book, Ritholtz provides cautionary tales of concentrated positions gone wrong, from billionaire Naguib Sawiris putting half his wealth into gold to the Belfer family losing billions in Enron, Madoff, and FTX. These stories reinforce the value of diversification, which Ritholtz calls "the only free lunch in investing."
The book notes that "just 1.3% of the public companies in the United States account for all the market gains during the last three decades," making the odds of picking long-term winners extremely low. This concentration of returns makes a compelling case for broad index investing, which Ritholtz endorses as ensuring investors "will own the rare and outsized winners that drive much of the market gains over time."
A Philosophy of Humility
Perhaps the most valuable advice in "How Not to Invest" is embracing intellectual humility. Ritholtz encourages investors to regularly say "I don't know" and to question their own knowledge and beliefs. "What do I know? What do I believe in, and why? How can I tell when I am wrong? What will I do about it?" are questions he believes all good investors must constantly ask themselves.
This humility extends to recognizing the role of luck in success. Ritholtz emphasizes that "as a field becomes more crowded with talented, skillful players, the role of luck becomes ever more important." This perspective helps investors avoid overconfidence in their abilities and maintain appropriate caution.
Conclusion
"How Not to Invest" offers a comprehensive roadmap for avoiding the most common and costly investment mistakes. Ritholtz advocates for a simpler approach to investing: "All other things being equal, simplicity beats complexity every time. A portfolio of passive low-cost indexes should make up the core of your holdings."
In a world obsessed with finding the next investment edge, Ritholtz's focus on avoiding mistakes rather than seeking genius offers a refreshing and practical alternative. By following his advice to be "consistently not stupid," investors may indeed gain the long-term advantage that has eluded so many who chase outperformance through complexity, prediction, and concentration.
Disclosure:
Blue Infinitas Capital, LLC is a registered investment adviser. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.