A billionaire's economic forecast is no more trustworthy than financial advice on short video
The halo effect makes people treat everything a successful person says as insight, but outside their own field they are just as clueless; good advice is humble and probabilistic, bad advice is confident and specific.
The argument · tap a timestamp to hear it
The halo effect makes billionaires' forecasts look credible
Ritholtz says billionaire economic forecasts have two features: first, like everyone else they talk their book — they hold assets, so they are naturally bullish, and that bias cannot be avoided; second, most of them are simply not qualified to make economic forecasts. What is truly dangerous is the halo effect — people see someone who is extraordinarily successful in one field and extend the halo to everything he touches. But spoiler alert: they are not successful in other fields, they are just good at the one thing they are good at, and they are just as clueless about the future.
— Barry RitholtzGood advice is humble and probabilistic, bad advice is confident and specific
The tells for spotting bad advice: appeals to emotion (scaring you, stoking your greed, pushing FOMO), manufactured urgency (‘the market is going to crash in September’ is a huge red flag, not insight). Good advice tends to be both humble and probabilistic — ‘I don't know what will happen, but here are the various outcomes and their probabilities.’ Bad advice sounds very confident and very specific. Ritholtz also offers the ‘3D’ framework: doubt (people with no self-doubt often don't know their own blind spots), depth (you need a long track record backed by a repeatable process), Dunning-Kruger (not just overconfidence, but the degree to which you understand the boundaries of your own skill). The most expensive sentence for a novice investor is ‘how hard can this be.’
— Barry RitholtzNews is a daily beast that must be fed
The media always has column inches to fill, newsletters and columns to write, 24/7 broadcast television to air — but that unrelenting demand on your attention is fundamentally incompatible, on a time scale, with the investor's goal of letting a portfolio compound over years and decades. For a long-term investor, following the news is not merely useless, it is negative — it damages your returns, because the media constantly pushes you to act, and people are born with an action bias, and history tells us most financial decisions are not good ones, and the fewer decisions you make the better the results tend to be. Ritholtz cites new research by Henry Bessembinder: if you had bought at the inception of the S&P 500 and then done nothing, you would have significantly outperformed all the rebalancing and adding and trimming in between.
— Barry RitholtzThe IRS issued a 42-point notice just to debunk short-video finance
Ritholtz says the algorithm rewards the loudest, most extreme views, and this content is ‘financial junk food.’ He gives two examples: first, the US IRS had to issue a 42-point press release debunking, one by one, 42 things on TikTok and Instagram — following them is not just wrong, some will get you fined, some will get you clawed-back payments plus interest, some will get you thrown in jail. Second, mothers' old saying: don't take candy from strangers. You don't know who the person giving you advice is, what their record is, what their method is, or whether their temper catches fire the moment something happens, and taking advice from a rando on social media is financially the same as taking candy from a stranger.
— Barry RitholtzGell-Mann amnesia: you know a source is wrong and still trust it
Michael Crichton told a story: he read an article about an event he had personally lived through, and the reporter got it completely wrong, but he turned the page and believed what was on the next page. That is Gell-Mann amnesia — you see that a source is wrong in a field where you have professional judgment, yet you keep giving that source credit. Ritholtz's response is to build a list of sources he has verified over many years, but he stresses ‘that's my list, you have to make your own list,’ and not to outsource your thinking. He also says the media as a whole does a decent job of reporting the news, but you need to be skeptical of exaggerated claims — extraordinary claims require extraordinary proof, and we often don't see that proof.
— Barry RitholtzSturgeon's Law: 90% of financial products are crap
Ritholtz says several of his favorite pieces of investing philosophy come from books. The first is Sturgeon's Law: when science fiction writer Ted Sturgeon was criticized for sci-fi being terrible, he responded ‘90% of everything is crap.’ Ritholtz turns it into Ritholtz's Corollary — 90% of financial products are crap: most mutual funds are bad, SPACs are bad, most stocks are bad, and a lot of bonds are bad too. The second is statistician George Box's ‘All models are wrong, but some are useful’: a model is only a mathematical projection of the world, not a hologram, and every model has built into it the assumption that the future will look like the past, so when the future changes the model fails. The third is William Goldman's ‘nobody knows anything’ — Hollywood passed on Star Wars, The Princess Bride and Raiders of the Lost Ark, and Keanu Reeves couldn't get a major studio to make John Wick, which went on to become a two-billion-dollar franchise.
— Barry RitholtzExpensive valuations are not a reason not to buy stocks
Ritholtz says the most common mistake is: seeing high PE, CAPE or price-to-book and deciding to stay out of stocks. He asks in return: that judgment would have kept you out of US stocks since 2015, and would have kept you out of large growth stocks for decades. Valuation is a ‘flexible snapshot,’ and what you should look at is the full moving picture. He concedes valuation has directionality — expensive means future returns below average, cheap means above average — but in 1977 and 1978 stocks were cheap, and buying in still took three or four years to turn positive, so it cannot be used as a timing system.
— Barry RitholtzYour world is shutting down, the index is going up
During the pandemic he was asked the same question over and over: restaurants, retailers, airlines and hotels around me are going out of business, so why is the market rising? He says this is a classic case of the availability heuristic — what you see is your own real-world experience, but the market is weighted by market capitalization. They went and counted: all these failing industries combined made up only about 6% of the S&P 500. And the S&P 500 rose about 69% from its March low over the rest of that year. Apple, Microsoft, Amazon, Target and Walmart were fine, and so were the companies that could pivot to delivery. The same mismatch shows up today with AI: why is the market rising, if we are all going to lose our jobs? He asks in return: how do you know we are all going to lose our jobs.
— Barry RitholtzAll equity value comes from 1-2% of stocks
Ritholtz cites research by Hendrik Bessembinder of Arizona's business school: almost all equity value is driven by 1% to 2% of stocks, with slight variation by region and country. So why do you think you can win at 100-to-1 odds, or to be generous, 50-to-1? His analogy is a plane going down with only one parachute, and the 1-in-50 chance goes to you — you would not be happy. Conversely, indexing gets you into the top half of market performance over ten or twenty years, and into the top quarter over 25 to 30 years. He cites Bogle: everyone is chasing alpha, but you can't get alpha without starting from beta; the index is the Christmas tree, and everything else is just ornaments hung on it.
— Barry RitholtzThe danger of concentration comes from being forced to hold
Ritholtz lists a string of companies that went to zero: Lehman, AIG, General Motors, General Electric. Concentrated positions arise in a few ways: founder stock, inherited stock with a low tax basis, ESOP shares granted by your company. He gives the GE example: the ESOP match, as he recalls, was around 15%, and the result was that employees' 401(k)s were 50%, 60%, 70% GE. His assessment of Jack Welch is extremely harsh, calling him the most overrated CEO in history: he took over as the 1982 bull market began, left at the 2000 top, and left behind an old industrial company trading at 47 times earnings and a brewing GE Capital accounting scandal, while the people who took over cleaned up the mess and took the blame.
— Barry RitholtzThe price of not wanting to pay capital gains tax
Many people refuse to sell a concentrated position on the grounds that ‘I don't want to pay capital gains tax.’ Ritholtz's response: the way to make sure you never pay capital gains tax is to never have any gains. He gives Cisco: from its March 2000 high, it took 25 years to get back to break-even, having fallen 93% in the meantime. He also notes that Cisco and Qualcomm in 1999 were hot spots for this kind of conversation.
— Barry RitholtzFinancial success is defined as freedom and optionality
Barry defines portfolio success as freedom, opportunity, optionality — being able to create meaningful value for yourself and your family, and reducing the stress that money brings. He was poor when he was young, and he says the worst part of being poor is not being unable to buy a nice car or a nice watch, but the endless stress at the bottom of Maslow's hierarchy: food, rent, insurance. Once you get past that line, you have to recognize that the marginal utility of every extra dollar is diminishing, and that income hits a plateau at some point.
— Barry RitholtzComparison is the thief of joy
Barry throws out the line he didn't put in the book and is saving for the next one: Comparison is the thief of joy. He calls social media a cancer, precisely because it makes comparison the norm. He gives a concrete exercise: to make yourself miserable, open Zillow and look at what is for sale in the nice neighborhoods closer to the water or downtown. His father-in-law built an 800-square-foot, three-bedroom, one-bath cottage in the Hamptons in 1961 — crude conditions but a wonderful experience: they dropped off the dog and the luggage and went straight to the beach. Later, when they looked for a vacation home themselves, they were stunned by sale prices of 40 million, 50 million, 60 million.
— Barry RitholtzOnce you have enough, the hardest part is starting to spend
Barry says that for clients who have already hit their number and entered the decumulation phase, the biggest challenge is getting them to spend the money. You have spent your whole life working and saving, and making that turn is very hard. The directions he offers include: give the inheritance away early, while you are still alive and can see your children enjoy it; or build a structure that reduces stress and means you no longer have to worry about it. He thinks that is all anyone can ask of a portfolio.
— Barry RitholtzIn their own words · checked verbatim
I like to channel John Kenneth Galbraith, who said, "There are two kinds of forecasters. Those who don't know and those who don't know they don't know."
Barry Ritholtz8:19
There's nothing more expensive from a novice investor than the sentence, "Hey, how hard can it be?"
Barry Ritholtz11:23
investing is the art of using imperfect information to make probabilistic assessments about an inherently unknowable world
Barry Ritholtz22:34
the paper's authors reviewed over 30 life domains and determined that on average, failure occurs about 61% of the time
Barry Ritholtz37:48
you have to be aware that valuations are really a a flexible snapshot when you should really be looking at the full moving picture
Barry Ritholtz46:55
these are big emotional events and very often um we we have a tendency to emotionally react. And then when the emotion fades, we're we're left with our mistakes. So, take a breath and just keep buying.
Barry Ritholtz49:58
Well, let me tell you a surefire way to never pay capital gains tax. Don't have any gains.
Barry Ritholtz1:10:16
Comparison is the thief of joy.
Barry Ritholtz1:34:41
this is part of the reason why social media is such a cancer
Barry Ritholtz1:34:41
the biggest challenge we have with clients who have hit their numbers and begun the decumulation phase is getting them to spend the money
Barry Ritholtz1:36:42
Figures
| Number of points in the IRS debunking notice | 42 | 15:26 |
| Number of life domains examined in the paper | more than 30 | 37:48 |
| Average failure rate calculated in the paper | 61% | 37:48 |
| Average failure rate guessed by respondents | 41% | 37:48 |
| Share of the S&P 500 made up of failing industries | about 6% | 51:59 |
| Gain of the S&P 500 from its March 2020 low | about 69% | 53:01 |
| Share of stocks driving all equity value | 1% to 2% | 55:04 |
| Time for Cisco to break even from its March 2000 high | 25 years | 1:10:16 |
| Size of Barry's father-in-law's Hamptons cottage | 800 square feet | 1:35:41 |
| Year Barry's father-in-law built the Hamptons cottage | 1961 | 1:35:41 |
| Premium Barry paid for his car | 25% | 1:33:39 |
Glossary
- halo effect
- Because someone is successful in one field, assuming he is also right in other fields.
- Gell-Mann amnesia
- Knowing a source gets things wrong in a field you know, yet continuing to trust it elsewhere.
- Sturgeon's Law
- 90% of everything is crap, from science fiction writer Ted Sturgeon.
- decumulation
- The phase after retirement when you shift from accumulating to withdrawing and spending your assets.
- ESOP
- A plan that grants employees stock in their own company as a benefit, easily leading to concentrated positions.
How to listen
Founders, investors and engineers, especially anyone with a concentrated position or a habit of watching finance short videos.
The car-buying segment at 1:33:39 can be skipped.