Barry Littlets
Barry Littlets
Barry Littlez had a hard time writing his first book, “Bailout Nation.”
The biggest challenge drafted during the 2008 financial crisis, he said, was that another company would “explode” each week.
Ritholtz, chairman and chief investment officer of Ritholtz Wealth Management, an investment advisory firm that manages over $5 billion in assets, felt “never finished.”
In comparison, new books were “joy” to write primarily for hindsight to profit, Risorz said.
The book “How to Don’t Invest: Ideas, Numbers, Actions to Destroy Wealth – and How to Avoid them” was published on March 18th, and is a kind of history lesson.
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Littlets reflects on anecdotes of pop culture and finance. Getting into Hollywood Titans like Steven Spielberg, musical sense like the Beatles, and corporate pariahs like Elizabeth Holmes of Terranos, explaining the disconnect between people who think people know and what they actually know. (Ritholtz’s point is that Beatles and films like “Raiders of the Lost Ark” were first panned. Holmes, who was initially praised, is currently serving prison time.)
“It’s a big advantage to say, ‘I know how the game ended’,” Risorz said. “What analysts were saying in the second, third and fourth innings, I didn’t know what they were talking about.”
CNBC spoke to Ritholtz about why people are often bad investors, why famous investors like Warren Buffett are “mutants” and why financial advice on buying a $5 latte is a never-ending cliché.
This interview was compiled and condensed for clarity.
How to “go ahead of peer investors”
Greg Iacurci: Your No. 1 tip to become a better investor is to avoid mistakes. What are the most harmful, unforced errors that are common?
Barry Ritholtz: Take one from three broad categories: bad ideas, bad numbers, and bad behavior.
Bad ideas are wherever you look, people want to tell you what to do with your money. It’s a fire hose of things. Everyone sells you some bulls***. And we really need to be a little more skeptical.
In terms of numbers, it’s the largest [mistake] Simple: We don’t understand how powerful a composite is. Many of the stupid things we do get in the way of that compound interest. Cash is not a store worth it. It is a medium of exchange and you should not hold cash for a very long time. It should always be moving. This means you pay for your rent or mortgage, pay your bills and your taxes, whether it’s what you want to do, what you want to do, what you want to do, what you want to do, what you want to invest, what you want to do, what you want to do, what you want to invest. But money should not just sit down.
Compounds are exponential. “If you invest $1,000 in the stock market in 1917, what is the value today?” Looking at what the market was returned (8%-10%, dividends were reinvested), a century later $1,000 is worth $32 million. And people simply can’t believe it. 10% [reinvested dividends] This means that your money doubles every 7.2 years.
maximum [behavioral error] Simply put, we make emotional decisions. That immediate emotional response will not result in good results in financial markets. That’s exactly why people chase stocks and get money and buy it high, and why they get scared and panic and sell low.
If you just avoid these three things, you’re miles ahead of your fellow investors.
Not all plays are “Hamilton”
GI: Back to your mention of how unforgiving bad financial advice is, what are some of the financial advice and investment opportunities you have come across?
BR: There are a lot of weird stuff like play, restaurants and more. As you know, most plays are not “Hamilton” and most restaurants are not nobu. These are really, really difficult investments. They are all winners. You haven’t seen millions of other products in the same space that you didn’t make it.
I think we have this truly distorted world perspective. And that’s because you won’t see endless failures, bursting restaurants, plays that close after opening night. All these small investment opportunities coming, and the people selling [them]the advice they are giving, they are always weird and quirky. Great restaurants are really good business, but most restaurants are terrible business, which is hard for people to recognize.
Financial ‘cliches’ refusing to die
GI: There’s this big part in this book talking about $5 coffee. One idea is that if you invest that money instead of buying coffee, you’d basically be a billionaire. You write that it is “a cliché that refuses to die.” Why do you think it’s harmful for people to think this way?
BR: $5, really? I don’t want to come across as a completely separate 1%, but if a $5 latte is the difference between having a comfortable retirement or not, you did something very wrong.
Let’s say you put in $5. If you save $5 each day and invest, it becomes something. But looking at 20, 30, 40, and the year, what will my income be on the other side of the spending equation? How much are you planning to earn? If you show me $5 compound interest over 30 years, you have to show me where my income is. If I consider this to be 30, will my income be 60? What will my portfolio look like? And if I have kids, my 529 [college savings] Plan – how did it get worse at the same time? If you’re only looking at a $5 latte, but ignoring everything else, and even before you reach inflation, it looks like a lump of money, but in reality it’s not.
The big philosophical problem I found is that most of the old sin of spending do not understand what the purpose of money is.
GI: What is the purpose of money?
BR: Money is a tool. First of all, a lack of money certainly creates stress. You can worry about paying the bill, and if you have kids, how am I going to pay for their health care? Not having enough money to pay rent, buy food, or pay for health care is certainly stressful. The first thing money does is that it drives away the lack of money.
Everyone sells you some bulls***. And we really need to be a little more skeptical.
money [also] Create an option. It gives you a choice. It gives you freedom. It allows you not to do many of the things you don’t want to do. And it allows you to buy time and make memories along with the experiences of friends and family.
When you finally get to that point, it’s the way you want, the ability to spend time with the people you love.
GI: What should people do to make investments as simple as possible and to achieve good results?
BR: [Vanguard Group founder] Jack Bogle realized this 50 years ago. If you want to find needles in the haystack – If you want to find apples, Amazon, Microsoft, nvidias, JP Morgan, United Healthcare, Berkshire [of the world] – Do not search for needles in the haystack. Just buy the entire Haystack. (Editor’s note: “haystack” here refers to the purchase of index funds that track a wide range of stock markets, rather than selecting winners.)
Make the core part of your portfolio into a wide index and place whatever you need around it.
So start with a basic index, be very taxed what you’re doing, then go back to the actionable ones.
Warren Buffett’s crazy thing: His wealth has doubled over the past seven years. Think about how crazy it is. He is 94 years old. Just as half of his wealth came from zero [his late eighties]and the other half were born in the past seven years. That’s the miracle of compound interest.
