10 Biggest Ideas in “How NOT to Invest”

It is March 18th! Publication day is finally here!

The challenge in writing “How NOT to Invest” was organizing a large number of ideas, many of which were only loosely connected, into something coherent, understandable, and, most importantly, readable.

It took a while of playing around with the concepts, but eventually, I hit on a structure that I found enormously useful: I organized our biggest impediments to investing success into three broad categories: “Bad Ideas,” “Bad Numbers,” and “Bad Behavior.”

That insight greatly simplified my task of making the book both fun to read and helpful for anyone interested in investing.

Here is a broad overview of each of the 10 main sections, which can help you quickly grasp the key ideas in the book.

Bad Ideas:

1. Poor Advice: Why is there so much bad advice? The short answer is that we give too much credit to gurus who self-confidently predict the future despite overwhelming evidence that they can’t. We believe successful people in one sphere can easily transfer their skills to another – most of the time, they can’t. This is as true for professionals as it is for amateurs; it’s also true in music, film, sports, television, and economic and market forecasting.

2. Media Madness: Do we really need 24/7 financial advice for our investments we won’t draw on for decades? Why are we constantly prodded to take action now! when the best course for our long-term financial health is to do nothing? What does the endless stream of news, social media, TikToks, Tweets, magazines, and television do to our ability to make good decisions? How can we re-engineer our media consumption to make it more useful to our needs?

3. Sophistry: The Study of Bad Ideas: Investing is really the study of human decision-making. It is about the art of using imperfect information to make probabilistic assessments about an inherently unknowable future. This practice requires humility and the admission of how little we know about today and essentially nothing about tomorrow. Investing is simple but hard, and therein lies our challenge.

Bad Numbers:

4. Economic Innumeracy: Some individuals experience math anxiety, but it only takes a bit of insight to navigate the many ways numbers can mislead us. It boils down to context. We are too often swayed by recent events. We overlook what is invisible yet significant. We struggle to grasp compounding – it’s not instinctive. We evolved in an arithmetic world, so we are unprepared for the exponential math of finance.

5. Market Mayhem: As investors, we often rely on rules of thumb that fail us. We don’t fully understand the importance of long-term societal trends. We view valuation as a snapshot in time instead of recognizing how it evolves over a cycle, driven primarily by changes in investor psychology. Markets possess a duality of rationality and emotion, which can be perplexing; however, once we understand this, volatility and drawdowns become easier to accept.

6. Stock Shocks: Academic research and data overwhelmingly reveal that stock selection and market timing do not work. The vast majority of market gains come from ~1% of all stocks. It’s extremely difficult to identify these stocks in advance and even harder to avoid the other 99% of stocks. Our best strategy is to invest in all of them through a broad index. Some terrible trades are illustrative of this truth.

Bad Behavior:

7. Avoidable Mistakes: Everyone makes investing mistakes, and the wealthy and ultra-wealthy make even bigger ones. We don’t understand the relationship between risk and reward; we fail to see the benefits of diversification. Our unforced errors haunt our returns.

8. Emotional Decision-Making: We make spontaneous decisions for reasons unrelated to our portfolios. We mix politics with investing. We behave emotionally. We focus on outliers while ignoring the mundane. We exist in a happy little bubble of self-delusion, which is only popped in times of panic.

9. Cognitive Deficits: You’re human – unfortunately, that hurts your portfolio. Our brains evolved to keep us alive on the savannah, not to make risk/reward decisions in the capital markets. We are not particularly good at metacognition—the self-evaluation of our own skills. We can be misled by individuals whose skills in one area do not transfer to another. We prefer narratives over data. When facts contradict our beliefs, we tend to ignore those facts and reinforce our ideology. Our brains simply weren’t designed for this.

Good Advice:

10. This is the best advice I can offer:
A. Avoid mistakes (fewer unforced errors, be less stupid).
B. Recognize your advantages (and take advantage of them).
C. Create a financial plan (then stick to it). If you need help, find someone who is a fiduciary to work with.
D. Index (mostly). Own a broad set of low-cost equity indices for the best long-term results.
E Own bonds for income and to offset stock volatility. Primarily
Treasuries, investment-grade corporates, munis, and TIPs.
F. Be tax-aware. Consider direct indexing to reduce capital gains and
reduce concentrated positions.
G. Use a regret minimization strategy when sitting on outsized single position gains.
H. Be skeptical of all but the best alts (VC/PE/HF/PC). If you have access to the top decile, take advantage of it. Otherwise, exercise caution.
I. Spend your money intelligently: Buy time, experiences, and joy. Ignore the scolds.
J. Fail better. Understand what is and is NOT in your control.
K. Get rich: Here are the classic strategies to get rich in the markets, including how difficult each is and their likelihood of success.

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I was just discussing the idea with Morgan Housel and Craig Pierce —  “Is this anything?” and now it is the day it arrives! (Hardcover and ebook are published today; Audible audio version is out tomorrow).

How did that happen so quickly…?

You can order it in your favorite formats in the US, UK, or around the world. If you want to learn more before putting down your hard-earned cash, check this wide array of discussions, podcasts, reviews, and mentions.

This book was a joy to put together, and I have been delighted at the response it has received! Please let me know what you think of it at HNTI at Ritholtz Wealth dotcom.

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