Recently a prominent member of the libertarian community died. Notable about the individual’s death is what he left behind.
Though he earned good money over the decades, the pay was in no way astronomical. Yet as you’re reading this review of the very much alive Barry Ritholtz’s excellent new book, How Not to Invest: The Ideas, Numbers, and Behaviors That Destroy Wealth – And How to Avoid Them, the deceased libertarian’s estate is said to be allocating funds north of $10 million to various liberty-oriented causes.
From reading Ritholtz’s book, it was apparent that this austere individual (in appearance and spending habits) invested his surplus earnings over the decades in the way that Ritholtz himself advises readers and clients to invest: limit unforced errors while being less stupid than others. Combine time with prudent allocation of funds matched to the market and you’re looking at a lot of money in retirement and at death. This basic message is what Ritholtz preaches in repetitive fashion throughout the book, and it must be said that the repetitive quality of the book is one of its greatest features.
From the introduction right on through the final page, Ritholtz is clear that his book “is designed to reduce mistakes – your mistakes – with money.” The latter is crucial exactly due to Ritholtz’s empirically correct view that one needn’t be a great or market-beating investor to have a happy retirement as much as one must avoid the errors that sap the genius of compound returns. Slow and steady wins the race, or something like that.
What’s fun is that while Ritholtz is preaching a very conservative investing style, his own style of writing and communicating ideas is anything but. Put another way, Ritholtz is fun.
Plainly a fan of movies, music and books, Ritholtz makes a powerful case against individual stock portfolio building via the classic William Goldman line about Hollywood: “no one knows anything.” But rather than solely quote Goldman and Goldman’s own experience as a screenwriter to make a case about an opaque business future, Ritholtz expands on how Goldman came to conclude “no one knows anything” with all sorts of lively anecdotes found in his own reading. It turns out all but one studio passed on Raiders of the Lost Ark, Columbia Pictures chose to make Starman instead of E.T. while passing on Back to the Future altogether, and 20th Century Fox allowed George Lucas to take a 70% salary cut ahead of making a little film called Star Wars in return for “merchandize and sequel rights” to the franchise.
In music, Ed Sullivan turned the Beatles down twice for his eponymous show, Dave Dexter (head of A&R at Capitol Records) kept turning down the Beatles' music for U.S. distribution, while the Los Angeles Times (a newspaper long praised for its quality music coverage) observed about the Beatles that “not even their mothers would claim they sing well.” Look up the early reviews of most any Beatles album, including Abbey Road, and you’ll find numerous negative reviews. Nothing’s obvious because no one knows anything.
Though Ritholtz describes Lawrence Summers as brilliant (this one’s tough to countenance, but most economists would nod along to “brilliant” as an accurate description of Summers), he’s not afraid to reference a June 2022 assertion by Summers that “We need five years of unemployment above 5% to contain inflation.” While books could be and have been written (including many by yours truly) addressing the myriad absurdities, fallacies and outright falsehoods found in Summers’s assertion that resoundingly insults wrong, Ritholtz uses it to further his crucial point about how little those allegedly in the know really know. Ritholtz and your reviewer would no doubt disagree about what inflation is (he seems to view it as higher prices, I view it as a shrinkage of the exchange medium), but of much greater importance we’re in agreement that economic forecasters make astrologists appear serious by comparison.
The various Hollywood, music and economic examples are cited to give readers a flavor of how Ritholtz thankfully utilizes entertaining anecdotes to make bigger points. Almost certainly the biggest point is that if the experts in various fields are horrendously awful at sensing what’s ahead, so by extension must investors be at seeing around the proverbial equity-market corner. This is true about the typical retail investor ascribing to his or herself the ability to pick stocks, but if Ritholtz is to be believed, it's also true about investment professionals who imagine a facility to see ahead. Their conceit can be astounding. Consider Michael Burry.
In contemplating Burry, it’s no reach to assume many reading this review have read Michael Lewis’s The Big Short. How I know the latter to be true beyond its bestseller, made-into-a-movie status is that every piece ever posted about Michael Burry’s (a featured investor in Lewis’s book) stock-market views attracts an outsized number of clicks at RealClearMarkets, which I edit. Ritholtz makes the crucial point that as was the case with so many of the individuals who timed the mortgage correction well on the way to fame and fortune, Burry’s mortgage call proved his only publicly prescient one. Ritholtz writes that since then, Burry “has been looking for a replay of that era to no avail, making regular predictions about an imminent stock market crash.”
To be clear, it’s not just Burry. Ritholtz notes that Rich Dad, Poor Dad author Robert Kiyosaki has “morphed int a panicky doomer”, which wins him lots of attention, it probably sells books, but how disastrous to invest his expressed misery. Ritholtz doesn’t write about him, but easily James Grant’s greatest value to investors is as a walking, talking contrarian indicator. Find out what Grant thinks will happen, then invest contrary to Grant’s unhappy view of the world in order to thrive. When I was at Goldman Sachs, clients of the firm were known to call their institutional and private bank coverage, only to ask what the economists there were forecasting ahead of making money investing against the forecasts. Ritholtz, who provides readers with endlessly good quotes from major names inside and outside of investing, cites a classic from often wrong economist John Kenneth Galbraith’s (check out his 1960s prediction about GM, among others…) quip that “There are two kinds of forecasters: those who don’t know, and those who don’t know what they don’t know.” In Ritholtz’s own words, “I come not to praise forecasters, but to bury them.” And bury them he does. It’s one of the most joyous aspects of a joyous book.
At RealClearMarkets, years ago “crash” was banished from any headline for reasons that Ritholtz would appreciate. “Crash” talk is click bait, but nothing more. As Ritholtz writes late in the book, equity prices “reflect all of what is publicly known.” The previous assertion is hardly novel, and Ritholtz isn’t saying it’s novel, but it’s crucial just the same. And rates routine mention with all the “crash” analysis so popular among market commentators well in mind. The analysis presumes not just market stupidity, but ferocious amounts of it whereby pundits presume to see the oncoming bus well ahead of those in possession of the same information. It’s not serious. Paraphrasing what Ken Fisher has long said in sober fashion, whatever you think you know, good or bad, is already priced. Amen.
What’s fascinating about Ritholtz’s analysis is that he’s not just explaining to readers the frequent folly of individual stock picking. Much more important, Ritholtz is explaining to readers that even if they are skilled stock pickers such that they’re capable of outperforming the S&P 500, they’ll still almost certainly underperform the S&P over time for reasons unrelated to performance.
Assuming “the world’s greatest trader” can routinely outperform the S&P 500 on an individual basis by 2 or 3 percent, implied in such performance is a lot of buying and selling as gains are realized. Which is why it’s generally a huge waste of time and brain space for a self-proclaimed “world’s greatest trader” to be picking stocks. Why? In Ritholtz’s words, it’s about taxes. “Depending on the length of your holding, your tax bracket, and which state you live in, the government could end up capturing a lot of your gains.”
Even more interesting, Ritholtz cites analysis from Ritholtz Wealth Management colleague Ben Carlson in which he tracked the theoretical returns of the world’s worst market timer versus the world’s greatest market timer. Yet even there, over long stretches the market seer who only exists theoretically doesn’t do much better than the individual routinely buying “at the highs before huge drops.” Why is this? Most readers likely know. It’s about compounding. Which is a reminder that time is the greatest asset for investors, and nothing else comes close. Check out Warren Buffett’s wealth when he turned 60 versus today if you’re still uncertain.
Readers can perhaps guess where this is going. Ritholtz is making a case for investors to go the low-cost Index or ETF investing route over investing for themselves. As a portfolio manager at Fidelity once put it to me (it’s unknown if his quip was original, likely not), investing one’s own money is like cutting one’s own hair. Or arguably worse.
Ritholtz expand his case against individual stock pickers to the fund managers in order to call into question active management of mutual funds. He writes that “Only 1% of fund managers actually earn their fees,” which is another way of saying that most active managers underperform the S&P 500. Against such long odds, Ritholtz asks readers “Why do you believe that you can pick them [the 1 percent of fee-earning active managers) out?” It’s an intriguing question that rates lots of discussion, and perhaps a little pushback?
While reading Ritholtz, I found myself wanting to ask questions and comment in the process. About passive versus active investing, Rob Arnott once pointed out to me something along the lines that “I spend may days making markets efficient.” In other words, markets gain their efficiency from active management. After that, and if index/ETF investing is increasingly the answer to the how-to investing question, doesn’t the latter position active managers for future outperformance exactly because they’re potentially going against the market grain?
Adding to the above question, Ritholtz quotes the great Howard Marks (Oaktree Capital) as saying that investment success is a function of being “more right than others…which by definition means your thinking has to be different.” Ok, but if the herd is going in the direction of index/ETFs, doesn’t the previous fact set stock pickers up for their own golden age? In a politics/trade sense, those who should know better far too often think about innovation in a “we must beat China” sense. Actually, the more that the Chinese thrive the better off we are, and vice versa. China isn’t the economic enemy of the U.S., and the U.S. isn’t the economic enemy of China. More realistically, the U.S. economy would be in desperate shape absent China, as would China’s absent the U.S.’s. Can it be said that active and passive managers similarly need each other?
None of which subtracts from Ritholtz's main message. He's trying to convey that investors needn’t be great. They simply must avoid mistakes frequently borne of emotion. At times these maxims can reveal themselves in somewhat trite fashion (“If you have a loser, admit it, own it, and learn from it.”), but it’s much more often informative in that Ritholtz is telling readers in entertaining fashion that investment success is much more an effect of avoiding disastrous years than of having great, market-outperforming years.
What about down market stretches that go on and on? In asking the question, it’s hard not to wonder if Ritholtz’s book itself is a market signal of just that kind of long-term bear looming. When the lessons seem so easy, isn’t this when much of the negativity no longer informs equity prices? Yet even there Ritholtz has good answers, particularly about 1966-1982 and 2001-2013 when markets were essentially flat. His take is that you invest as much as you can during the down to flat stretches so that you can get a much better future at a discount. In his words, “No matter how dire the circumstances, our species has prospered.” So very true. At risk of sounding jingoistic, it’s easy to forget that in buying the S&P or some kind diversified basket of stocks, investors are buying American genius.
What’s sad is that too many investors too often forget what they’re buying. What causes them to forget is that they allow their politics to inform their investing. While Ritholtz plainly leans left, he shines here. He cites commentary and sentiment from both sides predicting bad market returns while Republicans or Democrats are in control only to reveal as empirically very true what Warren Buffett has long said: Berkshire Hathaway buys stocks no matter the president in office. No doubt politics and legislative error can harm stocks and the economy (policy matters), but as Ken Fisher has always said, capitalism is much faster than politicians and regulators. Fisher, like Ritholtz, avoids politics. The problem is that so many close to politics (this includes your reviewer at times) let their policy and political viewpoints inform their commentary. Ritholtz cites an old column by frequently banal Hoover Institution scholar Michael Boskin titled “Obama’s Radicalism Is Killing the Dow,” but also Democrats who were certain Donald Trump’s first term would destroy the stock market. Progress tends to overrun the individual inside the White House.
At the same, policy once again matters. It has to. For a time stocks did well during George W. Bush’s presidency, but if you’d put $10,000 into the S&P 500 when Bush entered office in 2001, you were down something like 34% when he exited in 2009. This isn’t to say that politics should inform one’s investing, but it is to say that as information machines, markets price the ineptitude of the individual in office (W. Bush), or arguably at times they cheer the inability of the White House occupant to get much done (Barack Obama after 2010 after the Democrats lost control of Congress). It’s hard to know the extent to which Ritholtz might agree with this paragraph if at all, and it’s possible he would simply say it’s not relevant relative to the long-term genius of American ingenuity. Which means there would be no argument with him.
Where arguments did come up concerned a few things that Ritholtz observed. While out to “bury” forecasters and experts broadly, it seemed at times that Ritholtz was making some of the same mistakes as the experts he’s cautioning his readers against. On the subject of higher prices that Ritholtz deems “inflation,” he writes that when consumers pay the higher prices while complaining about them, “they are also creating more inflation.” One senses he could be persuaded to rethink his analysis. A higher price pre-supposes a lower price exactly because economics is about tradeoffs: if consumers are paying more for certain goods then by definition they have fewer dollars for other goods. True inflation is a shrinkage of the monetary unit, and the latter decidedly did not happen from 2021-22 when Joe Biden was being blamed for causing inflation not just by Lawrence Summers, but also all manner of Republicans who discovered their Keynesianism in overnight fashion during Biden’s presidency.
On the subject of shareholder value, Ritholtz writes that “We have since learned its problems,” that a “Short-term focus on quarterly earnings” can have negative long-term effects for shareholders. Except that most would in no way equate a CEO’s focus on shareholder value with reverence for quarterly earnings. Investors certainly don’t. See Amazon and its many years without earnings, see the patience of Silicon Valley investors where startup failure is the 90%+ norm, but also see the pharmaceutical and oil sectors. To tie the importance of serving shareholders to quarterly earnings reports misses the point.
Ritholtz equates government spending cuts or the desire for same with “austerity.” That didn’t read as fair. While it should be said that a focus on deficits is a dangerous distraction (my next book is titled The Deficit Delusion) from the real problem of extraction, it’s hard to say that a reduction in the cost of government amounts to austerity. All it means is that Donald Trump, Joe Biden, Nancy Pelosi, Mike Johnson, Chuck Schumer and Mitch McConnell have fewer dollars to centrally plan economic activity with.
As for “radical deregulation” as the cause of 2008, oh come on. Not only is the latter evidence of Ritholtz embracing the same hindsight bias that he rightly disdains, he’s clear that market prices are “the most efficient collective probability bet about the future” that we have. And those prices in no way corrected once it became apparent that individuals who could almost never get jobs in finance (regulators) had less control over financial firms than they previously did. The bet here is that Ritholtz could be persuaded at least somewhat that the crisis wasn’t “financial” as is given the happy truth that markets are always and everywhere correcting mistakes, at which point the real crisis was one of government intervention in what would otherwise have been a healthy correction.
Which is just a reminder that when individuals tell you they predicted 2008, they’re lying. At the same time, it’s a call for market pundits to tone down their criticism of the bulls who took their bullishness into 2008. To have predicted what happened required predicting the surely inept actions of George W. Bush, Ben Bernanke, and others who felt the answer to a market correction was a partial suffocation of the market message within the correction. Sorry, but precisely because Ritholtz is so right about prices reflecting “all of what is publicly known,” the logical corollary to Ritholtz’s truth about so-called “financial crises” is that there are none. There’s just government intervention.
Still, it must be stressed that the quibbles mentioned are just that. Barry Ritholtz has written an excellent and very informative book about investing that is most importantly a lot of fun. With short chapters full of anecdotes that give life to the points being made, How Not to Invest is always informative while never, ever boring.
