In this episode of Executive Connect, Melissa Aarskaug sits down with Barry Ritholtz, co-founder of Ritholtz Wealth Management, to talk about why intelligent investors still make costly mistakes. Barry breaks down the psychology behind bad financial decisions, the danger of overconfidence, why so many people follow terrible advice online, and how behavior often matters more than information. He also shares lessons from major market moments, what AI can and cannot do for investors, and why simple discipline still beats flashy predictions.

This episode is for investors, executives, and high earners who want to build wealth without letting noise, ego, or fear wreck the plan. Press play before your next money decision gets made on emotion instead of discipline.

Chapters:
(0:00) Start with a real financial plan
(0:50) Why behavior beats information
(2:17) From lawyer to investor
(4:48) Why fiduciary advice matters
(12:27) The danger of finfluencer advice
(17:18) How behavior drives investing results
(22:33) Biases that wreck portfolios
(32:20) Wealth-destroying habits to avoid
(38:48) Lessons from past market calls
(48:42) Where AI helps investors
(55:58) The tennis lesson for investing

Barry

(0:00) Step one is have a plan. (0:02) I’m always surprised so many people don’t have a financial plan. (0:06) Listen, I’m not one of these guys that thinks you need to budget to every last penny and don’t, you know, I hate the don’t buy a latte nonsense.

(0:15) But at the very least, hey, here’s our gross income. (0:18) Here’s what we think our taxes are going to be. (0:21) This is our mortgage, our car payment.

(0:23) Here’s what we spend on vacation, clothes, travel, entertainment. (0:28) Here’s what the kid’s like. (0:30) You should have some rough outline of a budget.

(0:33) And within that budget, you should have some idea of what you’re going to need to buy that house or maybe that vacation property, what you’re going to need to put the kids through school, what you’re going to need to retire. (0:44) So that’s just, you know, one on one start, start with a financial plan.

Melissa

(0:50) Let’s be honest. (0:51) Most investing mistakes don’t come from bad data. (0:55) They come from bad behavior.

(0:58) Smart people read the same reports, follow the same markets, and still end up with very different outcomes. (1:07) Not because they lacked information because they reacted differently under pressure. (1:13) Today’s guest has built a career calling that out.

(1:16) Barry Ritzwaltz, co-founder of Ritz Holtz Wealth Management, manages billions in assets and has spent decades cutting through noise, bad marketing advice, and flawed thinking. (1:30) If you’ve ever wondered why intelligent investors still make poor decisions or how to avoid becoming one of them, this conversation is going to hit home. (1:39) And I totally need you to re-pronounce your last name because I messed that up.

Barry

(1:44) It’s been mangled my whole life. (1:46) Ritz Holtz, Ritz Holtz. (1:49) Since I was in second grade, just no one ever gets it right.

Melissa

(1:54) Me either. (1:55) But you know what? (1:55) I just want to pronounce people’s name right for that exact reason.

Barry

(1:59) I go through the same thing.

Melissa

(2:01) I’m excited to chat. (2:02) Now, you co-founded an independent, employee-owned firm managing billions of dollars. (2:09) That sounds like a deliberate choice.

(2:12) What and why did you do that differently from day one?

Barry

(2:17) I don’t want to say it was a deliberate choice. (2:21) It was never my intention to become an RIA or an asset manager. (2:27) Undergraduates started out physics and applied math, eventually switched to political science and philosophy, went to law school, loved law school, hated the practice of law.

(2:40) And one of my clients was the predecessor firm to E-Trade. (2:45) And one day I get a tour of the training room and, oh, this looks like fun. (2:50) And so sell my practice, start on the desk as a trader, and brought the same sort of analytical rigor that physics and math and law require, which is understanding facts, understanding syllogisms, meaning what rules apply to this.

(3:10) How could we figure out with a novel set of data to apply existing rules? (3:15) And trading and investing are very similar to that. (3:19) Only you have to start with a little humility and recognize how little you know about what’s going to happen in the future and how little you actually know about what’s going on today.

(3:32) Most people don’t, especially on Wall Street, don’t adopt that belief system. (3:39) They’re all about, you know, fake it till you make it. (3:42) It turns out that if you want to be a successful investor, one of the first questions you have to ask yourself is, hey, what do I really know to be true?

(3:50) And what am I just guessing? (3:51) What is rumors, myths, speculation, and opinion? (3:54) And what is fact?

Melissa

(3:55) Ready to lead smarter and invest wiser? (3:59) On the Executive Connect podcast, we unpack executive strategies for wealth and influence. (4:05) Hit the subscribe button now.

(4:08) Don’t just watch, act. (4:10) Yeah, and that’s the key. (4:11) I think it’s so hard right now, at least for me, to discern what is true, what is not true, what is good advice, what is bad advice.

(4:19) With technology and AI and good influencers, you know, I get pop-ups about things that I have to step back and be like, that sounds like really bad advice, and then go do the research myself. (4:31) And so where do traditional wealth firms become misaligned with their clients? (4:38) Because I’ve been investing since I was eight, I say, and I feel like I’ve been misaligned so many times with advisors.

(4:46) And I’d love to get your perspective on this.

Barry

(4:48) So I think historically, so let me step back a sec. (4:54) If you are a doctor, you take the Hippocratic Oath. (4:57) If you’re a lawyer, you have ethical rules, you’re obligated to act.

(5:01) A lawyer, an accountant, anybody with that sort of relationship has a fiduciary obligation to act in the best interest of their clients. (5:12) But because of the history of Wall Street and the of finance, which has historically been a, and I use this phrase very purposefully, a rich man’s game, because it was all about the wealthy, and that was 99% men. (5:32) It’s been a rich man’s game for most of the time.

(5:34) The whole democratization of finance and investing that began in the 1960s. (5:40) Merrill Lynch is bullish on America. (5:43) It’s had an impact, but still, the top 1% owns something like 40, 50% of stocks.

(5:50) The top 10% brings you up to 70%. (5:54) The bottom 90% owns practically nothing. (5:58) So maybe it’s a little more democratized.

(6:01) But when we launched the firm, it was pretty clear, why should one of the most important relationships you have in your life have the same obligation to you as the guy selling you a used Honda? (6:15) It should be more like your financial advisor should be a fiduciary, like your accountant, like your lawyer, obligated to put your interests ahead of their own. (6:27) And the history is that that was never the case.

(6:32) And when we launched the firm in 2013, that was starting to get a little bit of traction, but it was still an outsider perspective, an unusual view. (6:44) I think the past 12 years, and we went from under $100 million to just under $8 billion over that 12-year period. (6:53) I think that our view, hey, own a broadly diversified portfolio of low-cost index funds with a little bit of flavor around the edges, and make sure the person who’s managing that for you is a fiduciary.

(7:11) I think the street has come over to our point of view, but it was very much an outsider perspective for a long time.

Melissa

(7:18) Yeah, I would agree. (7:19) I think when I think about the first brokerage account I set up, it was all about picking a specific stock that the advisor liked. (7:28) And that’s how I started trading, is we picked different stocks that they like, we traded, we did some things, and I trusted them to really make me more money, essentially, with the money that I had.

(7:44) Talk to me a little bit about how does being employee-owned change decision-making internally?

Barry

(7:53) So first, I just have to push back on the word like. (7:58) You were being sold stocks, not that the employee liked, but whatever they were most incentivized to sell that day. (8:05) Hey, we have a syndicate deal, go push this stock, we’re trying to do this.

(8:09) A buddy used to say, they’re called brokers because they make you broker. (8:13) I don’t know if that’s too old school anymore. (8:16) So being a fiduciary means that everything we do is in the client’s best interest.

(8:23) So we are aligned with the clients. (8:27) Being employee-owned is a furtherance of that because there’s no private equity money. (8:34) We bootstrap this ourselves.

(8:37) There are 85 employees and about 30 by the end of this year, there’ll be 33, 34 partner owners of the firm. (8:45) That means nobody is telling us, hey, go sell this profitable annuity. (8:50) Go load up clients with this mediocre private crap.

(8:55) We get to determine what the portfolios look like, what the allocation looks like, and all of the additional services that we have added and don’t really charge additional for. (9:08) Tax consulting, estate planning, all those sorts of things. (9:13) And if you want to hire the tax group to actually file your taxes, we can do that also.

(9:19) All those things came because clients asked for it. (9:22) Hey, my accountant doesn’t understand capital gains and he didn’t check this box that you guys, when you did your audit found. (9:30) It’s so funny.

(9:32) Everybody spends so much time chasing market performance, chasing alpha. (9:37) If you’re 50 basis points ahead or below of the S&P 500, clients don’t notice. (9:43) But if you identify a mistake, oh, your accountant forgot to check this box and you’re going to get a $400,000 refund because you paid capital gains taxes on something that should be tax exempt.

(9:55) Man, that stays with them. (9:56) They’re like, well, that’s a lot of money. (9:59) So being employee owned means nobody’s telling us what to buy, what to sell, what to own, how much to charge.

(10:09) And the suite of services we offer very much are driven by client demand.

Melissa

(10:14) That’s great. (10:15) Yeah. (10:15) I think it’s really funny because I love to talk about CPAs because I often have had to use more than one CPA because they didn’t understand all the different type of investments I have.

(10:27) So it’s really important to have that kind of lever to pull because ultimately taxes are one of our single biggest expenses. (10:35) So why not save where you can and pay less than taxes? (10:38) Of course, we don’t want to pay our taxes.

Barry

(10:40) Right. (10:40) It’s giant. (10:41) Think about whatever you make in terms of income, side hustles and capital gains.

(10:47) Oh my God. (10:48) That’s the single biggest line item you’re going to pay in any given year is taxes. (10:53) And it’s not the CPA’s fault it’s the Congress and IRS who have just made this so complicated.

(11:02) The fact that investing accounting is its own narrow little niche because the IRS rules and the exceptions and the special qualifiers are, I confuse 529, 351, 1031, all these different ways to manage. (11:20) All right. (11:21) 529 is college account.

(11:22) 351 is an exchange. (11:25) You could take an appreciated stock and swap it for an index and not pay capital gains. (11:29) I think 1031 is the real estate version.

(11:31) Like it’s endless. (11:33) There’s hundreds of pages of this stuff. (11:36) If you swim in those waters all the time, you get really good at it.

(11:40) And we have a great tax team. (11:41) They’ve just been so additive to the client experience, but we hired an estate attorney because so many clients were asking us, hey, I have this will or I set up this trust. (11:55) I’m not really sure I understand it.

(11:57) And when your guy is explaining it to them, as opposed to their guy, oh, these guys really know what they’re doing when it comes to money markets and what the law allows. (12:07) None of this is gray. (12:09) Everything is black letter law.

(12:11) Here’s what the IRS says is kosher. (12:14) So knock yourself out. (12:16) But it’s just endless.

(12:18) And it changes every year. (12:20) It’s never the same year to year. (12:22) So you’re constantly have to stay on the cutting edge of what’s allowed.

(12:27) Before I forget, since I just mentioned the IRS and you talked about fin influencers, finfluencers, there’s so much bad financial advice on Instagram, TikTok. (12:44) I don’t know whether to call it extra Twitter still at Facebook, et cetera. (12:50) The IRS and this is a chapter in the book, the IRS had to release a set of 46 things that they’ve identified on TikTok or Instagram that will either get you penalties, fines or jail time if you follow this advice.

(13:10) So, you know, there’s the problem. (13:13) I think we can all agree that social media’s promise didn’t amount to what we were hoping for. (13:21) And it has just become toxic over the years.

(13:24) But worse, there’s no guardrails, there’s no editors, there’s no accountability. (13:31) People can say really reckless, irresponsible stuff and it gets lost in the feed. (13:37) It just scrolls away and no one holds them accountable, except for idiots like me that will occasionally shame a few finfluencers in a chapter in a book and just generally warn.

(13:49) And, you know, the thing I always tell people is your mom had this right 20 years ago, never take candy from strangers. (13:59) I grew up hearing that, you know, don’t take candy from strangers. (14:03) You don’t know who this is or what.

(14:05) So if you won’t take a candy bar from a stranger, why would you take financial advice from someone who you don’t know who they are? (14:12) You don’t know what their track record is. (14:14) You don’t know what their process is.

(14:16) Hey, what’s their temperament? (14:18) Do they freak out every five percent and tweet something idiotic that other people pay attention to? (14:23) Have they lived through a few cycles?

(14:26) If you don’t know any of those answers to those questions about that person, then why take the candy from a stranger? (14:33) The best case scenario is you’re getting advice that the best case scenario is it’s random and not geared to you. (14:43) And the worst case is you get into trouble either with a bad investment or IRS headaches.

Melissa

(15:14) Intangible drilling costs applied against active income. (15:18) Minimum investment is $25,000 and the sponsor invests right alongside every single deal. (15:25) Learn more at texasfreedomfund.executiveconnectpodcast.com Energy opportunity and Texas grit working for your portfolio. (15:37) Yeah, it’s true. (15:39) And, you know, it’s interesting because there’s a lot of it out there. (15:43) I don’t know.

(15:44) Like every time I’m on social, I see something. (15:47) I’m like, that’s interesting. (15:48) That sounds great.

(15:49) Let me let me look into it. (15:50) And I’m like, this is crazy. (15:52) And it has like millions of views or something.

(15:54) Right. (15:55) And so I think it’s so true to be careful. (15:58) You know, not all free advice is good advice.

(16:02) And to really, you know, think about what you pay for it.

Barry

(16:06) I mean, there’s some truth to that. (16:08) You can find some good advice that doesn’t cost you much or anything, but you need a process to separate the good from the bad. (16:19) And let’s be honest, be not just social media, but traditional media.

(16:24) It’s a fire hose. (16:27) Some of it is really useful. (16:29) We definitely live in a golden age of information access.

(16:33) At the same time, there’s a can I curse? (16:42) Let’s just call it nonsense. (16:44) Bullshit that’s out there that, hey, you know, clickbait and attention is a product that some people sell.

(16:54) And so by being ridiculous, being outrageous and what the hell, if it’s bad advice and someone loses a ton of money, not their problem. (17:01) They’ve already gotten the views and they’re going to sell you whatever nonsense product they have for sale. (17:07) So the more outrageous the statement is, the more likely it is to attract attention and the less likely it is to be useful or intelligent.

Melissa

(17:18) Yeah, I totally agree. (17:20) Let’s talk about this behavioral edge. (17:23) You were an early adopter of applying behavioral economics to investing.

(17:29) Why does behavior matter more than most people realize?

Barry

(17:33) So for me, it was, I started on a desk. (17:38) They don’t really give you a whole lot of training. (17:40) You know, they throw everybody in the deep end and whoever doesn’t drown.

(17:44) OK, congrats, you’re a traitor. (17:46) But I was always fascinated. (17:48) You know, there’s you’re on a long desk of people within a few seats of you on each side.

(17:53) And hey, I’m a newbie. (17:55) Teach me. (17:55) Why are you doing this?

(17:56) Explain this. (17:57) Explain that. (17:57) And I would get these explanations that, you know, they never really made a lot of sense.

(18:03) A lot of it was a little bit of myth and things just handed down from one generation to the next. (18:10) And, you know, if you’re remotely a math or science person, show me the data. (18:15) Show me the evidence.

(18:16) I want to see I want to see the numbers. (18:18) And so when I started trying to figure out why this trader was making money this month and this trader wasn’t, they were consuming the same information, reading the same newsletters, digesting the same media. (18:34) What was the difference?

(18:36) And it eventually I kind of hit on, oh, it’s their behavior and their decision making process that drives that behavior. (18:45) And so when you start researching that, there’s a handful of books about that in the 1990s, when when before Danny Kahneman and his deceased partner, Thomas Tversky, won the Nobel Prize for their work in behavioral economics in early 2000s. (19:08) The two books that really stood out.

(19:10) One was from a Cornell professor named Thomas Gilovich called How We Know What Isn’t So. (19:16) And it’s kind of broken up into thirds. (19:18) The first two thirds are all about the psychology of these different decision making things.

(19:25) And it’s kind of crazy. (19:26) You think you’re making a decision on your own when you don’t realize all these influences that are affecting your thought process. (19:36) In fact, one of my favorite examples is you go into a restaurant, you look at a wine list or you go into an appliance store to look at a refrigerator.

(19:46) There is always an exorbitantly priced refrigerator for sale. (19:51) It doesn’t matter whether or not they sell that $22,000 Sub-Zero. (19:56) It’s there to make the $8,000 refrigerator look reasonable.

(20:01) And the same thing is with the $2,000 bottle of wine makes the $300 bottle of wine seem almost cheap. (20:07) So that’s called anchoring. (20:09) And, you know, you think that you’re making a rational decision when and to give you an idea of how influential numbers are.

(20:18) They did all these different surveys. (20:20) They ask people a question. (20:22) First, they say, what is the last digit of your phone number?

(20:27) And then they ask like a question that nobody really knows the answer to. (20:31) But you can certainly you can certainly look it up. (20:34) And that question is something like, how many cardiologists work in the city of London?

(20:40) So maybe you can think about how many people are in London. (20:43) What’s the doctor patient ratio? (20:45) How many doctors are like maybe you can but for the most part, no one’s going to do it.

(20:49) And it turns out that if the last digit of your phone number is seven, eight, nine, you make a much higher guess than if the last digit of your phone number is one, two, three, like just saying the number completely irrelevant. (21:03) So and there are just endless, endless examples of that. (21:07) So Gilovich’s book was a good entry.

(21:10) And then Jack Schwager wrote a book called Market Wizards, where he did a series of interviews with all these people and it’s the same thing. (21:20) It doesn’t matter if they’re trading stocks, bonds, commodities, currency, futures, it didn’t make a difference. (21:26) It was all about how they make decisions, how they think about risk, how they manage their behavior.

(21:33) And it’s like, oh, so completely different approaches and academic psychology and an actual trader. (21:40) And they both are saying your behavior, your decision-making and all the unknown influences that kind of push your brain around, that’s what you really have to be aware of. (21:51) I don’t pretend that I can make those decisions any better than anybody else.

(21:59) But if you’re aware of that problem, well, then you could set up some guide rails and prevent yourself from making the worst possible decisions.

Melissa

(22:09) Yeah. (22:10) And so talk to me a little bit. (22:13) And I agree with that.

(22:14) I think there’s some ways things are used against people to better understand them. (22:21) But what are some of the most dangerous cognitive biases that investors kind of fall into? (22:28) What are some of the traps there?

Barry

(22:33) So I’ll give you a few of my favorites. (22:35) So everybody’s familiar with overconfidence, right? (22:38) We tend to be a little too confident and we believe in things, hey, my research will help me find a better stock or I have a good feel for the markets, I’ll be able to avoid the next downdraft.

(22:52) But when you go deep into the psychology that underlines that, there’s a concept called Dunning-Kruger. (22:59) And what is David Dunning is a professor at University of Michigan. (23:03) And he did a study to see how well people can evaluate their own skill sets.

(23:10) The technical term is metacognition. (23:13) How aware are you of your own abilities and skills? (23:18) And it turns out that the people, this is a discrete skill.

(23:23) That self-evaluation is a discrete skill separate from whatever the underlying skill is. (23:29) It could be driving a car, it could be hitting a golf ball, it could be investing. (23:34) I love to ask a room full of people that are all civilians.

(23:38) I don’t mean a driving camp or anything like that, but a room full of random people. (23:44) How many of you are above average drivers? (23:47) Three quarters of the hands go up, which is pretty mathematically impossible.

(23:51) And so what David Dunning had found out was people who are unskilled similarly are unaware of their lack of skills. (24:02) And it’s not until far along the skill curve that you reach people who are highly skilled. (24:09) And because they’re so aware of the difficulties, the complications, how hard it is to do their job at a very high level for a very long time, those people tend to underestimate their own skills.

(24:21) So it’s kind of the people who don’t know what the hell they’re doing, they think they’re pretty good. (24:27) The people who know exactly what they’re doing, they’re like, hey, I’m good, but I’m not great. (24:32) When in reality, most of these people are.

(24:35) So that’s just a classic skill, the classic error that everybody makes. (24:42) The other thing that’s adjacent to this, but very different, is we really have no idea what’s going to happen in the future. (24:53) And when I say that, the pushback I get is, well, we have some idea.

(24:59) I’m like, yeah, we know that the Andromeda galaxy will collide with the Milky Way in about six billion years. (25:06) But short of that, you don’t know what’s going to happen in six months, in a year, just go over the past five years. (25:12) Nobody in the fall of 2019 had in their 2020 forecast, by the way, global pandemic will shut the world economy and the stock market will do great.

(25:24) Like nobody had that doubt. (25:26) The war in the invasion of Ukraine by Russia. (25:31) Yeah, there were a few people who forecast that in 2016 and 2018.

(25:35) This is years and years later. (25:37) It didn’t happen when they said. (25:38) And on the eve of it, very few people were aware of it.

(25:42) I mean, it should have been in hindsight, perfectly obvious that inflation was going to spike. (25:48) When you have the biggest CARES Act one and two under President Trump, CARES Act three under President Biden, you have the single biggest fiscal spend as a percentage of GDP since World War II. (26:02) Jeremy Siegel was the only person that said, we’re going to see inflation eight, nine, 10%.

(26:07) And he was right. (26:08) It was 9%. (26:09) So other than a handful of outliers, for the most part, nobody knows anything about what the future is going to hold.

(26:17) And we know a whole lot less about what’s going on today. (26:22) But you have to get up in the morning, get dressed, send the kids off to school. (26:28) You have to live.

(26:30) So we all kind of pretend we know what’s going to happen. (26:33) Look, you cross the street, you look both ways, your brain can calculate, all right, that bus is far enough down the street, I can cross safely. (26:41) But short of stuff like that, we really know so little about what’s going to happen.

(26:47) This comes back to that lack of humility, that lack of admission of what you do know and don’t know. (26:55) And those are just a couple of examples of things that lead to, look, if you understood the math of compounding, you would realize your job is to not interfere with the market’s compounding over time. (27:12) To imagine that you’re going to tap out before the next drawdown and then jump back in at the right moment.

(27:20) History tells us people are terrible at that. (27:23) History tells us in any given year, less than half of all professional fund managers beat their index, less than half. (27:33) You take that to five years and it drops to 80%.

(27:38) You take it to 10 years, it’s 90% of managers underperform their benchmark. (27:44) And by 20 years, it’s everybody but a the Peter Lynch’s and Warren Buffet’s of the world, everybody else would have been better off indexing.

Melissa

(27:54) So talk to me a little bit about, there’s so many things I want to ask. (27:59) I’m thinking about, a lot of times there’s this ping pong between fear and greed, fear and greed. (28:08) And so I feel like it shows up a lot in portfolios along with high functioning, high performing professionals and leaders still struggle with actually creating some form of investing discipline.

(28:26) So I don’t know how to tie those two together, but I’m thinking fear and greed and very educated, successful professionals just don’t have this discipline. (28:36) They may be earning seven figures, but they’re not investing or they may be holding it in cash.

Barry

(28:41) So there’s two really interesting explanations for this. (28:45) The first, and I’m drawing a blank on the name of the professor who wrote about this. (28:52) The term is epistemic trespass.

(28:55) And what that means in plain English is people who are really good at one thing, assume that they can just step to the next task over and whatever their expertise in their core competency is, is going to transfer perfectly. (29:16) And the truth is you can be the greatest software coder, the greatest real estate builder. (29:23) It doesn’t matter whatever your skillset is, it’s specific and discreet.

(29:29) But the downside of it is that expertise gives you this confidence to imagine that you could do something adjacent. (29:38) So, hey, I build houses. (29:40) There’s a lot of finance involved.

(29:43) I have to track interest rates and what it’s going to cost me to buy this. (29:46) I’m tracking the price of commodities, wood, aluminum, all this thing. (29:52) So how difficult is investing from that?

(29:55) And the problem is they’re such completely different fields, even though it feels related. (30:02) The one group that is especially at risk for this are doctors. (30:11) Doctors, we have a client who’s an emergency room surgeon, a number of other medical professionals.

(30:19) They literally save lives. (30:22) My hands are blessed by God. (30:24) I am giving life.

(30:26) How hard is it picking out a couple of stocks? (30:28) I have a buddy who’s a stockbroker. (30:30) I went to college with him.

(30:32) He was an idiot. (30:33) I’m a genius lifesaver. (30:35) How difficult can it be?

(30:37) And so epistemic trespasses, it’s not that difficult. (30:43) And then all of a sudden you realize, wait, I went to medical school for seven years. (30:47) I studied this.

(30:48) I was an intern. (30:49) I was a resident. (30:51) They did the reps.

(30:52) They put in the 10,000 plus hours to imagine you’re just going to step in and, yeah, I can pick stocks. (31:00) And here’s the really crazy thing. (31:03) Arizona State, Hendrick Bessenbinder is that professor.

(31:07) And they did a study and discovered that some stocks go up a little, some stocks go down a little, some stocks crash and burn, but the stocks that create all of the value in the market, less than 2%. (31:21) So the odds are 50 to one against you picking the right stock. (31:26) I mean, in hindsight, of course, Nvidia is going to go through the roof.

(31:30) They pivoted to GPUs and AI a couple of years ago. (31:34) How did you not see this? (31:36) You could have bought Nvidia six months ago, two years ago, four years ago.

(31:40) You didn’t even have to buy it 10 years ago when it was a gaming chip company. (31:45) You could have bought it two years ago and you would have made a ton of money. (31:48) And yet so many people didn’t.

(31:51) And so that concept of, I think I know how to do this because I’m so good at everything else I do, it turns out to not be the case.

Melissa

(32:00) So let’s talk about your latest work on what investors should avoid. (32:07) That’s a really great way and a powerful lens to look at it and telling people what not to do. (32:13) So talk to me a little bit about what are the biggest wealth destroying habits you see today?

Barry

(32:20) So it’s all the usual ones. (32:23) It’s, let’s start really basic. (32:26) Have a plan, right?

(32:28) You would be shocked how many people don’t have a plan. (32:32) Like normally you go into any competitive activity. (32:39) So you’re going into a baseball game, you’re starting a war, you’re doing something that has a lot of moving parts, a lot of logistics, a lot of complication.

(32:48) Step one is have a plan. (32:50) I’m always surprised so many people don’t have a financial plan. (32:54) Listen, I’m not one of these guys that thinks you need to budget to every last penny and don’t, I hate the don’t buy a latte nonsense.

(33:05) But at the very least, hey, here’s our gross income. (33:08) Here’s what we think our taxes are going to be. (33:11) This is our mortgage, our car payment.

(33:13) Here’s what we spend on vacation, clothes, travel, entertainment. (33:19) Here’s what the kid’s college is like. (33:21) You should have some rough outline of a budget.

(33:24) And within that budget, you should have some idea of what you’re going to need, what you’re going to need to buy that house, or maybe that vacation property, what you’re going to need to put the kids through school, what you’re going to need to retire. (33:36) So that’s just 101. (33:38) Start with a financial plan and it helps if that plan includes a budget.

(33:44) Number two is, we were talking about humility. (33:47) Understand what you do know and don’t understand what your skills are. (33:52) Every now and then someone comes into the office and, hey, I’ve been investing my whole life, but we’re getting close to retirement.

(34:02) We want to travel. (34:03) I don’t want to stay up on this. (34:05) And the last time this happened, the wife says, he’s always buying stock and selling stock.

(34:10) And I look at the portfolio. (34:12) I’m like, hey, you’ve done really well. (34:15) If he wants to keep doing this, you’re not going to get an objection from me.

(34:19) Yeah, but I don’t want to spend all this time. (34:21) All right. (34:22) So leave your fund portfolio as 5% of your holdings.

(34:26) Take your 95% of the rest. (34:28) We’ll put it into a broadly diversified portfolio of low cost indexes. (34:33) That’s the other thing people forget is the costs and the taxes make a huge difference.

(34:38) So figure out what you’re good at and what you’re not good at for 90 plus percent of the people. (34:43) They’re not good at taking care of this. (34:47) Most portfolios weren’t like this gentleman’s that I saw last month.

(34:53) Most of them come in with too many stocks, too many mutual funds. (34:58) I think once you get past 5, 10 mutual funds, unless they’re all the same fund, you’re pretty diversified. (35:06) I’ve seen portfolios with 50 different mutual funds and 150 stocks.

(35:11) And at that point, you’re just in a giant expense of index funds. (35:15) Just cut out the middleman and just buy the spiders for five bips and as cheap as can be. (35:22) So have a plan, recognize what you’re good at, what you’re not good at, and try not to let yourself interfere with the market’s ability to compound.

(35:38) Compounding is an exponential, I’ll use a fancy math term, exponential mathematical formula, and that is not intuitive at all. (35:52) So I love to ask people this question. (35:55) Hey, a hundred years ago, there were two guys, two grandfathers, one buried a thousand dollars in cash and put it in a mason jar in the backyard, and the other put a thousand dollars into the S&P 500, which technically didn’t really exist, but let’s pretend it did.

(36:18) All right, a hundred years later, whenever I hear people say, oh, the value of the dollar has fallen 96%. (36:24) Well, yeah, if grandpa buried the money in a mason jar for a century, yeah, the a hundred dollars today buys 4% of what a hundred dollars a century ago. (36:34) But to show you how little we really grasp compounding, what would you imagine a thousand dollars compounds to over a century?

Melissa

(36:43) Take a wild guess. (36:44) It’s seven figures.

Barry

(36:45) Right. (36:46) Yeah. (36:47) People say a million dollars, $2 million, $32 million.

(36:51) It’s crazy. (36:52) You do the math of a thousand, two, four, eight, 16, 32, 64. (36:57) It’s the rule of seven at about 10% a year.

(37:02) So the rule of 72 is you divide the return percentage by seven, and that shows you how long it takes to double. (37:12) So if you’re getting 10%, which is what the market gives you over long periods of time, that means it should double every 7.2 years. (37:22) And you do the math, and it gets to a million.

(37:25) And the crazy thing is the last few doubles, the last 21 years, takes you from four to $8 million, eight to 16, and 16 to 32. (37:36) So this is why Warren Buffett is worth so much money. (37:41) Over the past seven years, he’s 95 now.

(37:46) So when he was a young man of 74, his money doubled from 74 to 81, doubled from 81 to 88, doubled again. (37:59) That’s how you’re worth a couple hundred billion dollars is you start out with a couple of billion dollars, and pretty soon it’s a ridiculous amount of money.

Melissa

(38:06) I love this because it’s so true. (38:09) And it’s funny. (38:10) Back to the social media thread, I’m getting a lot in my scroll now about pulling all your money out of the stock market, the stock market’s going to crash, and pay attention to what’s going on in the world, and move all your money to cash or to Bitcoin.

(38:27) And so let’s talk about lessons from major market calls. (38:37) So you were one of the few who warned ahead of some of the financial crises. (38:42) What did you see back then that maybe others didn’t pick up on soon?

Barry

(38:48) So I’m going to tell you about 2000, 2008, and 2020. (38:55) But before I do, I just have to caveat by saying, you really don’t know. (39:02) Were you smart?

(39:02) Were you lucky? (39:03) Was it a little bit of both? (39:05) Because when you’re wrong, when you make a mistake, you could do a postmortem and you know exactly where you went off the rails.

(39:13) But I use the example in the book of ARKK, which in 2020, which is managed by Kathy Woods, and she’s a fine investor. (39:23) This has nothing to do with her. (39:24) It just goes to show you people’s behaviors.

(39:28) So ARKK launched in 2014, something like that. (39:31) It was okay. (39:32) It did so-so.

(39:33) In 2020, she just happened to have Tesla, Bitcoin, and a couple of other things that went crazy during the pandemic. (39:41) And the fund returned 165% in that one year. (39:47) It was the single best performance of any non-leveraged equity funds in history.

(39:55) And yet here it is six years later, and her since inception returns, 2014 to 2026, still underperforming the S&P 500. (40:05) So if someone with the single best year isn’t beating the market, what hope do you have? (40:11) So that’s number one.

(40:14) Second, so 2000 was pretty obvious. (40:20) It was really a question of timing. (40:22) And I got it almost right for the wrong reasons.

(40:27) I was watching all my favorite stocks go through the roof. (40:31) You were starting to see things get a little wobbly, Yahoo, Dell, Intel, Cisco. (40:39) And towards the end, I came up with the thesis that there’s so many gains to be had in the fourth quarter of 1999 that no one’s going to want to sell until the first quarter because then they don’t have to pay taxes until April 2001, which turned out to be completely wrong.

(41:02) I was thinking with my own pocketbook, I was wrong. (41:05) But in late January, mid-January, I’m like, all right, you could take some money off the table here. (41:11) In particular, I spoke to a client that had a ton of Cisco.

(41:15) And Paul Sagawa at Alliance Bernstein was the guy who was, they call him the axe on Cisco. (41:23) He was the most popular analyst, and he loved it throughout the 90s. (41:29) And then mid-1999, he went from a buy to a hold to a sell over the course of like three quarters.

(41:37) And suddenly, the guy who was everybody’s favorite analyst couldn’t get arrested. (41:42) He was just persona non grata. (41:44) So we were not clients of his.

(41:47) I called him up and he was so bored. (41:49) He took the call. (41:50) He spent 45 minutes telling me all the things that were wrong with Cisco.

(41:55) When they launched, they did no vendor financing. (41:58) Now, more than nine out of 10 of their sales, Cisco finances. (42:02) So they’re not making a sale.

(42:04) Here’s our product. (42:05) And along with a loan agreement, you promised to pay us, they said to all these dot coms that were about to implode. (42:12) And so in part based on his analysis of Cisco, which was the biggest market cap stock at the time, bigger than Apple, bigger than Microsoft, bigger than Intel, it was going to be the first trillion dollar company, never quite made it.

(42:27) And the tax thing that I was completely wrong at, hey, you can get out of your dot coms and your stocks here in January, I said. (42:36) And we didn’t top out till March. (42:39) What I did get right was after the 90% collapse in the dot coms and the 83% collapse in the NASDAQ.

(42:49) Anytime quality stocks are cut in half in the United States, that’s a great entry point. (42:55) You just go back and look at history, 50% off, I’ll buy that 50% off. (43:00) So watching stocks in the fall of 02 and then the spring of 03, that was easy.

(43:10) And I don’t think there’s any rocket science. (43:12) Wait, the S&P was down 37%, the NASDAQ was down 82%. (43:17) Sure, you can buy them here.

(43:20) 08, 09 was a little different because it was pretty clear. (43:24) Some of it was anecdotal, some of it was just watching things that didn’t make any sense. (43:28) I remember we refinanced our first house in 05 and maybe it was 06, but it wasn’t much after that.

(43:39) And the guy literally pulled into our driveway, flung the car door open, left the car running, came running in. (43:46) So not only did we refinance at like a 3% lower rate, but it was a cash out. (43:52) We got a $30,000 check to redo what we ended up redoing our kitchen.

(43:56) But the guy came running in, sign here, sign here, initial here, initial here. (44:00) I got to go. (44:00) I got a house sale around the corner and I got to refile over here.

(44:04) I’m like, how many are you doing of these a day? (44:08) Because the guy didn’t even look at our documents, just here’s a check. (44:11) And we had jobs.

(44:14) My wife’s a teacher, I work in finance. (44:16) It’s not like we’re a no interest, no job applicant. (44:20) He’s like, I’m scheduled for 40 a day.

(44:23) I barely get through 30. (44:25) And I said to my wife, this is going to end terribly. (44:28) That personal experience.

(44:30) So that’s what sent me looking for the data. (44:33) And again, there was a Reinhart and Rogoff paper. (44:38) Eventually that paper became, This Time is Different, their book.

(44:42) But it historically says that when you have a leverage-based credit bubble, real estate falls about 30%, stocks fall about 50%. (44:53) So that was the forecast. (44:55) Hey, this is clearly a bubble.

(44:58) But people who were too young to remember that back then, this was so aberrational from anything else you ever saw. (45:07) And then the bottom was just dumb luck. (45:10) My wife’s a teacher.

(45:11) We got back from when the board of education said, here’s where the spring break is. (45:18) And when I had set a target, it’s like a made up number of 6,800. (45:24) And we got back from vacation.

(45:26) And this is pre-iPhone, or I didn’t have an iPhone at the time. (45:30) The red light is beeping on the answering machine. (45:34) Hey, you said 6,800.

(45:36) And you said to remind you, a friend says, now or never. (45:40) So the dumb luck of when the school district said on the vacation, I sent out a note, cover your shorts, go long, everything looks. (45:48) We’re down 56%.

(45:50) Even if we drop another 10%, who cares? (45:52) You missed most of it. (45:54) Markets cut in half for a great entry point.

(45:56) I went on TV on Monday and the bottom was Tuesday. (45:59) That’s why I say you don’t know how much dumb luck is involved. (46:03) I had nothing to do with the school schedule, that board of education.

(46:07) I was away when we crossed my number because of a random thing. (46:11) And then in the end of March of 2020, this was easy. (46:19) You go through the history of market events where there’s an externality, an assassination, a terrorist attack, a war, a pandemic.

(46:28) There’s a rich history of the past century of what happens. (46:32) And the same thing happens every time. (46:34) Markets wobble and then they just go back to doing whatever they were doing beforehand.

(46:39) So you take that and you combine it with a $3 trillion stimulus. (46:45) Why would you not want to be along equities in that circumstance? (46:48) And again, you just had to have enough confidence, valid confidence, not excess confidence, that you’ve done the math.

(47:00) Here’s what history shows. (47:01) You have to admit, hey, there’s never any guarantees. (47:05) The headline of the, so I wrote a column for Bloomberg, don’t assume the pandemic ended the secular bull market.

(47:12) I got so much hate mail from that. (47:16) Normally I put something out and maybe I’m right, maybe I’m wrong. (47:19) I don’t know.

(47:20) The incredible emotional reaction back to it very much made me think, oh, I got to be onto something. (47:28) Nobody is positioned for the market. (47:30) So few of these people are positioned for the market to rally that as soon as it starts moving, everybody’s going to jump in late to the party.

(47:39) And I said, we could bounce right back to where we started. (47:42) I didn’t expect 69% from the March 25th lows till the end of the year on the S&P 500.

Melissa

(47:49) Money ripples is on a mission to help professionals like you get their money working harder. (47:56) Their clients free up an average of $35,000 their first year without having to work extra hours to show you how they’ve put together a powerful training called cashflow secrets. (48:10) And as a listener of the executive connect podcast, you can get it completely free.

(48:16) Just visit money ripples.com forward slash secrets and enter the promo code E X E C. (48:26) And I’m glad you mentioned that because I’m thinking, as the market’s evolving, technology’s advancing, what should investors and advisors be paying more attention to right now? (48:39) Yeah.

Barry

(48:42) First and foremost, it’s always your behavior. (48:44) You have to manage your behavior. (48:46) Second, you have to be a little cautious with the people who have been calling for the AI apocalypse.

(48:56) So my favorite example, I’ve been using this for a while and now I’m starting to see more and more people, more and more stories about it. (49:05) Radiologists were the canary in the coal mine. (49:09) Uh, AI was going to put radiologists out of business.

(49:12) We’re going to have technology and artificial intelligence, and no one is going to be needed to read x-rays or MRIs. (49:19) But it turns out that what AI is really good at is the boring, repetitive, easy over and over grind cases that take up so much time. (49:31) And this is a clear break.

(49:33) Uh, uh, this person broke their leg. (49:36) Here’s the thing. (49:37) Here’s the secondary break.

(49:38) Like the simple cases that take all this time, radiologists who work with AI say they get to spend, first of all, you have to do all the reps and go through all that in the start of your career. (49:49) But having seen a million of them, they get to spend more time on the edge cases, the things that are a little more unusual that maybe AI, you know, it’s, it’s hard to interpret. (50:01) Maybe they’ll get it right.

(50:02) Maybe they won’t. (50:03) So you want somebody with a lot of experience working on it. (50:06) And as it turns out, radiologists are not unemployed.

(50:11) If anything, they’re doing really just fine. (50:14) And so history tells us whenever new technology comes along, it will be disruptive and it will put people out of work. (50:24) But at the same time, it is going to create a lot of new jobs and adjacent jobs.

(50:29) So when I was, uh, briefly an attorney, like there, you didn’t have desktop computers. (50:37) There was, you had a terminal and there was a word processing department and a stenography department. (50:44) So you would either write out longhand or dictate a memorandum and you would hand it to them.

(50:50) And the next morning you would get a printed document, which you would mark up with red pen, right? (50:57) So when people say, Oh, red line, this, that that’s what that means. (51:00) Mark it up in red, you hand it back to them and they give you the next draft.

(51:04) And all those people no longer have jobs. (51:08) But, uh, in those, there aren’t stenographers really accepting courtrooms. (51:12) There aren’t, um, steno pools, there aren’t word processing groups, but all those other people, those people are now in other areas.

(51:23) And, you know, maybe we’re going to see really specific issues. (51:28) Um, AI is making it a little more challenging to get a job right out of college, those entry level roles. (51:34) But at the same time, we’re seeing new company formation at record highs.

(51:39) And that tells me, um, that a lot of people are starting new businesses with AI that would not have happened had it not happened. (51:47) So, um, yes, it’s disruptive. (51:51) Yes.

(51:51) There are some jobs that are going to go away. (51:54) Um, but historically when, and whenever new technology comes along, it also helps create a number of offsetting jobs to offset the loss.

Melissa

(52:03) Yeah. (52:03) And so where does AI genuinely help investors versus creating more noise?

Barry

(52:10) Um, you know, here’s the really crazy thing. (52:13) AI is still shockingly immature and new. (52:17) It’s still, uh, I don’t want to say a novel technology, but it is not a mature technology.

(52:24) Uh, I have a muni bond portfolio. (52:27) I download the spreadsheet of it and then upload it to Claude, which I find to be better than perplexity or chat GBT, but that’s just personal preference. (52:36) And, um, I, what is the yield to maturity?

(52:39) What is the return? (52:41) What is the tax equivalent return? (52:43) I ask him all these questions.

(52:45) It gets about half of them, right? (52:47) It’s a very specific calculation. (52:49) It requires a lot of information about who you are, what tax area, what state you live in, what city you live in.

(52:55) And even when you give it that it still gets it wrong. (52:59) It’ll get better. (53:00) Um, but you have to be somewhat aware of it.

(53:04) I find it’s useful if I’m looking into a company and I want to know more about that company, or I want to know more about that sector. (53:13) Um, it’s a great research tool. (53:16) The problem with AI as a research tool is everybody else is using the same tool.

(53:22) So it doesn’t give you an edge. (53:24) What it gives you is a comfort level that, all right, I feel pretty good with this. (53:30) Another behavioral piece of, of research.

(53:33) Um, it turns out the amount of information you need to make a good stock picking trading decision is this tiny, really small amount of information. (53:44) Um, but that’s not what most people do. (53:46) Most people go down the rabbit hole.

(53:49) They become full of information. (53:51) They know as much as anybody else, but the problem is they all know the same thing. (53:57) So there’s no edge, but first you have the sunk cost of your time and effort.

(54:02) So you’re reluctant to sell that stock when it stops working. (54:07) Um, and then second, it does create a little bit of, uh, unfounded self-confidence because you know so much about it. (54:16) What people, most people don’t realize is if it’s public information, it’s already in the stock price.

(54:23) The question isn’t how much do you know about this company? (54:26) If you want to pick stocks, the question is, what do you know? (54:31) What have you figured out that nobody else has?

(54:34) Right. (54:34) What I figured out, what Paul Sagawa figured out with Cisco was that if there’s any hiccup in the economy, um, all of these 93% of their sales that were vendor financed to dot coms, Hey, most of those are going to default. (54:52) So their sales are not what we think it is.

(54:55) Their sales are probably 50, 80, 90% less than we think it is. (54:59) He figured that out. (55:00) He was right.

(55:01) Uh, he was first. (55:03) It’s that sort of insight that has value, but learning everything that everybody else knows, no, no advantage there.

Melissa

(55:12) Yeah. (55:13) Yeah. (55:14) And so, you know, the real takeaway is great investing isn’t about chasing the next opportunity.

(55:19) Like the big deal, like the 1% does, right. (55:23) It’s about avoiding the obvious mistakes, staying disciplined and thinking clearly when others do not. (55:29) And like you said, at the very beginning, making a plan and really sticking to that plan.

(55:34) And, um, you know, what really stands out to me in this conversation is really, you know, getting better information and the ability to interpret it correctly and act with discipline and, you know, like your example of, you know, a hundred dollars over a hundred years. (55:52) And so I want to get any final thoughts or anything you want to leave with our listeners.

Barry

(55:58) Um, my, you know, one of the inspirations for this book, some publishers have been chasing me to write another book since bailout nation, uh, back in 2009. (56:09) And I, I get all of these finance books. (56:13) I don’t find a whole lot of value in most of them because you can do everything right and just make a couple of mistakes and blow, uh, whatever gains you’ve had.

(56:24) And so a big part of the inspiration for this was Charlie Ellis is an investing legend. (56:31) Um, he was the chairman of the Yale endowment. (56:34) He was on the board of directors of, um, Vanguard group.

(56:38) So he’s highly regarded and he wrote a book, um, winning the loser’s game. (56:46) And, and in the book, he compares investing to tennis and he says in tennis is really two games in one. (56:54) There’s a winner’s game and a loser’s game.

(56:56) What’s the winner’s game? (56:58) Well, the winner’s game are, is the game that, um, the professionals play that Federer and, um, the doll play and, and all the top players, they win by serving aces by hitting with power, with speed, with accuracy, a lot of top spin, they hit the ball, uh, away from their client, from the opponent. (57:19) Uh, they’ll, they’ll do these clever drop shots and they win by scoring points.

(57:26) But if you go to your local tennis bubble and watch how people play, the people who play there, they don’t win by scoring points. (57:37) They lose by trying to play outside of their abilities. (57:42) And what do I mean by that?

(57:43) They’ll double fault on a serve. (57:45) They’ll hit it into the net. (57:47) They’ll hit it wide to the left.

(57:49) They’ll hit it long. (57:50) I play with a bunch of guys much younger than me and they watch the, the, the dolls of the world and they’re crushing the ball right into the back wall. (58:02) My goal when I’m playing with these young studs who are 20 years younger than me, just return the ball.

(58:08) Just get it over the net. (58:10) Just keep it in. (58:11) Don’t double fault.

(58:12) Don’t hit it right to their sweet spot. (58:15) Hey, this guy’s like the cleverest thing I do is, Oh, he’s got a crappy backhand. (58:19) Let me keep hitting it to his backhand or, uh, like, uh, I’m not a little guy, I’m 200 pounds, but that fat bastard, I’m going to make him run back and forth across the, across the court.

(58:32) I’m not going to do anything fancy. (58:33) I’m just going to keep it away. (58:35) If he’s over here, I’m going to hit it over there.

(58:37) And so the person who wins doesn’t score the most points. (58:43) They make the least amount of unforced errors. (58:46) They make the least amount of mistakes.

(58:49) These guys I play with, they are all better than me. (58:53) They’re faster. (58:54) They’re stronger.

(58:54) They’re younger. (58:55) And I regularly kick their ass because they just want to crush it. (59:01) Right.

(59:02) They just like, they, anytime there’s an open, like a U S open, Australian open, a London open, I’m thrilled. (59:10) Cause I know they’re watching these monster serves and these powerful returns and they’re all jazzed up. (59:17) And I’m like, Oh, this is going to be like taking candy from a baby.

(59:21) These guys are just going to beat themselves. (59:23) And the same thing is true with investing, make fewer mistakes. (59:29) You don’t have to pick the next Nvidia.

(59:31) You just have to not blow yourself up, make less mistakes, keep more money. (59:36) And you beat 90% of your peers. (59:38) And you know what?

(59:39) If you end up in the top 10% of, of investors, that’s a pretty damn good place to be.

Melissa

(59:45) Well said. (59:46) Thank you so much, Barry, for being here and sharing your knowledge and time with our listeners. (59:53) That’s the executive connect podcast.