Co-founder, chairman and CIO of Ritholtz Wealth Management; author and host of the Bloomberg "Masters in Business" podcast and The Big Picture blog.
Asked for the single most important thing to make someone a better investor, Barry Ritholtz's answer is to stop the constant trading driven by checking your phone. It's the thesis of the whole episode.
“Put the fucking phone down. Stop trading.”
Ritholtz's model for building a portfolio: make 50-70% a broad low-cost index (the tree), then add whatever 'stink of your own' you want (momentum, tech, country bets) as decorations. You're starting from beta so at worst you keep up with the market.
“So pick a number, 50, 60, 70% of your portfolio is that core. And by core index, I mean, um, US broad-based market indexes. Uh, Vanguard's VOO last week became the first ETF over a trillion dollars. And that's just a super low-cost broad index. You wanna own some overseas stocks, that, uh, overseas indexes, that's fine. Now the tree is the, the garland, the decoration, the lights, the tinsel. That's whatever stink of your own you wanna put on your portfolio.”
Steal thisPut two-thirds of your portfolio in a broad low-cost index, then satisfy the urge to tinker with the remaining third.
Ritholtz's model for building a portfolio: make 50-70% a broad low-cost index (the tree), then add whatever 'stink of your own' you want (momentum, tech, country bets) as decorations. You're starting from beta so at worst you keep up with the market.
“So pick a number, 50, 60, 70% of your portfolio is that core. And by core index, I mean, um, US broad-based market indexes. Uh, Vanguard's VOO last week became the first ETF over a trillion dollars. And that's just a super low-cost broad index. You wanna own some overseas stocks, that, uh, overseas indexes, that's fine. Now the tree is the, the garland, the decoration, the lights, the tinsel. That's whatever stink of your own you wanna put on your portfolio.”
Steal thisPut two-thirds of your portfolio in a broad low-cost index, then satisfy the urge to tinker with the remaining third.
Ritholtz bought Apple at $15 (with $13 in cash per share) when the iPod launched, felt like a genius selling after it tripled to $45, and then watched it gain another 9,000%. His lesson: selling is the hard part, and any single stock can go to zero.
“I owned Apple when the iPod, not iPhone, iPod came out. It was $15 a share, $13 cash. There's no downside. And it tripled. It went up to $45. And I thought I was a genius selling it. And then it proceeds to gain another 9,000%.”
Ritholtz bought Apple at $15 (with $13 in cash per share) when the iPod launched, felt like a genius selling after it tripled to $45, and then watched it gain another 9,000%. His lesson: selling is the hard part, and any single stock can go to zero.
“I owned Apple when the iPod, not iPhone, iPod came out. It was $15 a share, $13 cash. There's no downside. And it tripled. It went up to $45. And I thought I was a genius selling it. And then it proceeds to gain another 9,000%.”
Reacting to Lloyd Blankfein saying he loves to day trade with ~70% of his net worth, Ritholtz says a billionaire should have that in muni bonds earning tax-free yield, and that actively trading it is the biggest risk-adjusted mistake of his career.
“Lloyd, listen to me. Put the fucking phone down. Stop trading. 70% of your net worth should be in muni bonds paying you a huge tax-free yield. You want to dick around with a few million dollars, knock yourself out.. But if you're actively trading 70% of your net worth, which is a couple of billion dollars, I am disappointed to tell you that you are making the biggest risk-adjusted mistake of your career.”
Ritholtz's advice to wealthy clients: at some point you have to declare victory, stop risking so much capital, and build a portfolio with the highest probability of hitting your goals. If your only goal is 'more,' you'll be disappointed in both your portfolio and your life.
“it is really difficult even for people who are, you know, masters of the universe billionaires to recognize and just stop and say, I won. Hey, I won. I don't have to put this much capital at risk because over the decades I have just seen that story play out and end badly.”
Steal thisDefine what 'enough' looks like, and once you hit it, shift capital from maximizing returns to protecting the win.
Behavioral finance research shows about a third of people who panic-sell into a market crash never return to equities, missing the recovery and ~15% annual compounding. A million-dollar portfolio sold at the bottom would be worth far less than if simply held.
“It turns out that people panic sell into a market crash, something like a third of them never return to equities.”
Citing Alex Imas's University of Chicago study, Ritholtz explains that fund managers' buys are rational but their sells are emotional: randomly selling any other position in the portfolio outperformed the manager's chosen sells by roughly 150-200 basis points. The fix: make fewer decisions.
“And it turned out that the random sells outperformed the manager-selected sells by something like 150 to 200 basis points. Maybe it was even more. It was some crazy amount. And it's like, it makes sense that the buys are thoughtful and logical, but the sells very often are emotional, impatient,”
Direct indexing buys the index's individual components so you can sell the worst-performing names, harvest the losses, and replace them with near-identical stocks — picking up 75-85 bps a year and helping unwind a concentrated position (e.g. Apple at 90% of a portfolio) without a giant capital-gains hit.
“this small-cap biotech is down 40%. I'm going to sell it and replace it with something that looks very similar, another small-cap biotech that's down in the same space. I harvest that loss. The portfolio value doesn't change. The way the portfolio trades doesn't change. But if you do that every year, you could pick up 75, 85 basis points.”
Steal thisIf you hold a big concentrated or low-basis position, use direct indexing to harvest losses and diversify out without triggering a large tax bill.
Ritholtz tells how Carlyle co-founder David Rubenstein, frustrated by a paralyzed Congress, offered to personally patch up the crumbling Washington Monument and 'see if you idiots can get around to passing legislation' — guilting them into funding permanent fixes for national monuments.
“So he steps in and says to Congress, hey, I'm going to fix this. "See if you idiots can get around to passing legislation. I'm just gonna patch it up. See if you can do a permanent fix, and I'd appreciate if you pay me back one of these days." And he basically guilted them into fixing all the national monuments.”
Ritholtz attributes David Rubenstein's success to finding sectors the rest of the market ignores and undervalues — like unsexy, post-Reagan-deregulation telecom in the 1980s — not just seeing around corners but identifying spots the market has missed entirely.
“He is really, really good at finding a, a, a space that is being ignored by the rest of the market. And not just ignored, but undervalued. So telecom wasn't sexy in the '80s. There was some post-Reagan deregulation and it kind of got ignored for a while.”
Steal thisHunt for sectors that are both ignored and undervalued, not just contrarian for its own sake.
Ritholtz applies 'never take candy from strangers' to financial commentary: before reading an unknown writer, do the research lift on their track record, process, whether they've survived multiple market cycles, and their temperament. Invokes Sturgeon's Law that 90% of everything is crap.
“my mom taught me never take candy from strangers, and that includes research, writing, commentary, opinion. Before I read something from somebody who I'm not familiar with, It's a research lift to decide, is this person worth the time, effort, energy? What's their track record? What's their process? Did they just get lucky once and that's it? Or do they have a defendable approach to this? Have they lived through a few cycles?”
Ritholtz infamously passed on Robinhood in 2014 at an $80 million valuation, calling a free-trading app for broke millennials 'the dumbest fucking idea I've ever heard.' His friend Howard Lindzon made $100 million on it. He uses it as his own example of finance's humility problem.
“I famously passed on, or infamously passed on Robinhood. In 2014, uh, at an $80 million valuation. I, uh, an app that lets millennials trade for free. That is the dumbest fucking idea I've ever heard in my life.”
Ritholtz Wealth Management has grown roughly 30% a year since launching in 2013, reaching $7.6 billion in assets, while charging average fees around 70 basis points and staffing far heavier than peers (35 people at $1B vs. an industry-typical 4).
“We don't— because we're private, we don't disclose our revenue and stuff. But, you know, we average somewhere around 70 basis points in terms of our fees. When we were a billion dollars, we had like 35 people.”
Ritholtz publicly called the housing crash early (spitballing a Dow price of 6,800) and then spent all of 2007 and early 2008 being laughed at on CNBC. His takeaway: when you make a contrarian call, there's a long, painful gap where you look like an idiot — and 'there's nowhere in between' right and wrong.
“So, you know, and I spent about a year being the dumbest man on Wall Street, which was kind of fun. All of '07, it's like, you're obviously an idiot.”
Ritholtz argues bubbles are great for the economy: the dot-com era laid hundreds of millions of dollars of fiber at ~$1,000/mile, the builders went bankrupt, and legacy cable/phone companies bought it for pennies per mile — making bandwidth-heavy YouTube, Facebook and Instagram viable. Every new technology gets overhyped, and that's a feature not a bug.
“The dot-com collapse comes, all these companies go belly up, and then the, the legacy cable companies and the legacy phone companies buy it up for pennies per mile. And because it was so cheap to own at that point, All the things that came afterwards, YouTube, Facebook, Instagram, all of the bandwidth-intensive technology, well, they wouldn't have been viable if it was $1,000 a mile to lay fat pipes, but for pennies a mile out of bankruptcy.”