How Not to Invest
Common investing mistakes catalogued by a working asset manager
Summary
Ritholtz, who runs an advisory firm and writes widely on markets, organises this around the argument that avoiding errors contributes more to investor returns than selecting good investments does. The structure follows bad ideas, bad numbers, bad behaviour and better outcomes.
The material covers the standard territory of the field: forecasting records that show market and economic predictions have no useful accuracy, the media and financial services incentives that generate a constant supply of confident predictions anyway, the cost drag from fees and taxes, the gap between fund returns and investor returns caused by buying and selling at the wrong times, the misuse of statistics in financial reporting, and the behavioural patterns that produce those decisions.
Ritholtz's contribution is compression and the accumulation of specific examples of confident predictions that failed, drawn from his long practice of collecting them. His prescription is conventional and he says so: hold a diversified low-cost portfolio, automate contributions, do not act on forecasts, and reduce the number of decisions you make.
The reference has not independently verified the specific studies and figures cited in this recent book. Readers should note that the argument and the conclusion are well established in the literature, that the book adds examples rather than evidence, and that anyone who has read Bogle, Malkiel or Housel will find the substance familiar. Its use is as a current and readable statement of a position that is correct and widely ignored.
Key takeaways 7
- Avoiding errors contributes more to long-run investor returns than selecting good investments does.
- Market and economic forecasts have no demonstrated accuracy, and the supply of them exists because media and financial services have an incentive to produce them.
- The gap between fund returns and investor returns is caused by buying and selling at the wrong times, and it is large enough to dominate manager selection.
- Fees and taxes compound against the investor and are the only reliably predictable component of future returns.
- Reducing the number of investment decisions made improves outcomes, because most discretionary decisions destroy value.
- Financial reporting systematically misuses statistics, particularly by presenting short-run performance and small samples as evidence.
- Automating contributions removes the decision points at which behavioural errors occur.
Who should read it
Individual investors who want a current readable statement of the avoid-errors position, though the underlying argument is available in several earlier books.
Where it sits in the reference 3
Who recommended it 1 · 1 direct
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