Latest news with #HowNottoInvest
Yahoo
31-03-2025
- Business
- Yahoo
Why meme stocks like GameStop could cause you headaches
Listen and subscribe to Opening Bid on Apple Podcasts, Spotify, YouTube or wherever you find your favorite podcasts. GameStop (GME) is once again on traders' minds after saying it would start to buy bitcoin (BTC-USD) to diversify its cash reserves. And for those who continue to love the struggling gaming company, its controversial CEO Ryan Cohen, and its meme stock peers, Ritholtz Wealth Management co-founder Barry Ritholtz has some potentially sobering advice. 'We all imagine that we're going to find that one random stock that's going to turn $10,000 into $10 million. I'm sorry, but it's a lottery ticket,' he said during a conversation on the Opening Bid podcast with Yahoo Finance Executive Editor Brian Sozzi (see video above or listen below). 'You're more likely to be hit by lightning than you are to do that.' Ritholtz opened his wealth management firm in 2013 and has racked up a string of recognitions that include ETA Advisor of the Year, placement on the FT top 300 US Advisors list, and being the fourth-fastest-growing registered investment adviser in America. He's also the author of "How Not to Invest," which came out on March 18. One essential way to destroy wealth, per Ritholtz, is joining the meme stock craze without a plan. Meme stocks such as GameStop became mainstream in 2021 after apps like Robinhood (HOOD) gamified trading and people were stuck at home during the pandemic. The frenzy saw shares of challenged companies like GameStop and BlackBerry (BB) spike out of the blue. During January 2021, GameStop went from under $5 per share to over $81. Although some amassed fortunes, 'you don't see the other 10 million meme stock traders who made no money or worse — went broke,' Ritholtz noted. More recently, after reporting a dismal year with sales down by 30% and profits declining by nearly 100%, GameStop announced plans to enter the crypto space. Lost in the initial excitement is that the company is technically still a retailer that operates over 3,000 retail stores. 'Have at it,' Ritholtz advised folks. 'When I was a kid, I used to watch 'Mutual of Omaha's Wild Kingdom.' There was always one [gazelle] that wandered away from the crowd and you knew what was going to happen. That was going to be lunch for a bunch of lions.' Pivoting from nature to sports metaphors, Ritholtz noted that the average basketball player wouldn't take on a legend like Michael Jordan or LeBron James, and similarly, the average investor is likely to not strike it rich in meme stocks. 'You just see the one or two people who made a ton of cash and everybody thinks, 'I want some of that lottery ticket,'' he said. 'I'm sorry to be the fly in the ointment. You're not. You're not going to beat Michael Jordan. You're not going to find a bajillion-dollar stock.' Obviously, there are outliers, which he also acknowledged through the lens of an investment adviser. 'If you are, for some reason, fortunate enough to own Nvidia or Amazon or Apple or Google or Microsoft or any of the great stocks of our era," he said. "If you own them cheaply, well, be sure to take care of the rest of your portfolio. Find a way to manage around that and don't risk taking a large fortune and turning it into a small fortune." For Ritholtz, the best investment plan is to stay cool and remember, 'there's no magic formula,' he said. 'There's no Substack that's going to get you rich.' GameStop's stock currently trades at $21.73, down 30% year to date. Three times each week, Yahoo Finance Executive Editor Brian Sozzi fields insight-filled conversations and chats with the biggest names in business and markets on Opening Bid. You can find more episodes on our video hub or watch on your preferred streaming service. Grace Williams is a writer for Yahoo Finance.
Yahoo
23-03-2025
- Business
- Yahoo
Barry Ritholtz explains how not to make 'stupid investing mistakes'
Barry Ritholtz, co-founder and chief investment officer of Ritholtz Wealth Management and a longtime adviser, digs into the things that have made him 'less stupid' in his latest book. "How Not to Invest: The Ideas, Numbers, and Behaviors That Destroy Wealth — and How to Avoid Them" isn't a navel-gazing reveal of his savvy investing philosophy, but rather a playbook on the theme that steering clear of errors is much more important than scoring wins. I asked Barry to share the mistakes that trip most of us up and what we can do about it. Below are excerpts of our conversation, edited for length and clarity. Kerry Hannon: Why are most of us better off sticking to a simple investing strategy? Barry Ritholtz: Historically, simple beats complex. If you're going to make something more complicated, there has to be an absolutely compelling reason. The more complicated things are, there are more things to break. Think about how much money has been attracted to Vanguard and Blackstone's core indexing because it's simple and it works. What are some of the pitfalls of building long-term wealth? The biggest single pitfall is our tendency to interfere with the markets' compounding. When I ask people, what is a thousand dollars invested a century ago worth today? They say, oh, a million dollars, $2 million. When you tell them it's $32 million, their heads explode. It's shocking to people. But that's the power of compounding. Please try not to get in the way of your own money compounding. It's the single best thing you can do. What are other common mistakes investors make? The more active you are, the more transactions you engage in, and the worse you tend to do because you're just creating more opportunities to be wrong. And we believe a lot of nonsense. Some of it is just myths that get repeated from generation to generation or ping around trading desks. I always laugh whenever I flip on TV and the market is down 2% and someone says, markets hate uncertainty. Do they really? Because there's got to be a buyer and a seller. That means that there's a disagreement as to the value of that asset. We are wildly overconfident in our abilities to do things that the professionals can't do. You know, no one would say to themselves, yeah, I could play Michael Jordan one-on-one in basketball. Nobody thinks that way. But when you step into the marketplace, you imagine that you're going to beat the house, that you're going to beat Michael Jordan. But trust me, you're not. Something like half of all the trades are done by institutions — highly qualified, deeply motivated with the latest, greatest, fastest tools. To imagine that you're going to step in and beat them on their home fields is just another mistake. It's also a mistake to not be selective when you dip into the fire hose of media that comes out about investing. You have to be a little discerning and discriminating. Curate viciously. You have to create your own team of people who you either watch or listen to or read. I don't mean you literally have to hire them, but hey, these are the people who have a defendable process. They've lived through a few cycles. They have a good track record. And it's not just dumb luck. On my all-star team are Morgan Housel, Jason Zweig, and Sam Ro. They have just consistently added value and been more right than wrong. They don't run around with their hair on fire when we're in the midst of a huge volatility spike. Read more: How to start investing: A 6-step guide By subscribing, you are agreeing to Yahoo's Terms and Privacy Policy What are some questions we can ask to avoid a lot of investment mistakes? Always ask yourself, what are the risks of this trade? Is this tailored to me, or is this for a general audience? What's this going to cost — not just the outright costs, but fees, taxes, and, of course, lost opportunities. And who is giving me this advice? What's their track record and do they have a conflict of interest? Do they have a fiduciary interest to zealously represent you and to perform their duties with diligence? They can't guarantee you what the market or the economy's going to do in the future, but can they say to you, this is a reasonable portfolio that is defendable and rational and increases the odds that you'll have a successful outcome down the road? You quote John Bogle, founder of Vanguard, as saying, 'just buy the haystack.' In other words, stick with index funds. Why is that still a great philosophy? In any given year, a majority of active fund managers underperform their benchmark, say, the S&P 500. Go 10 years and you're in the single digits of managers who earn their keep and outperform the benchmark. Take it to 20 years, and it's virtually nobody. You end up with a handful of outlier names and they become household names because they're unicorns — Warren Buffett, Peter Lynch, Bill Miller. With the indexes, you get diversification especially if you invest in a bunch of different indexes. You are guaranteed to find the Nvidias, the Apples, the Amazons, whatever are the biggest winners. And you get them in increasing stakes as they do better and better. You say this is the golden age for investors. What do you mean by that? You can move money around effortlessly. You can trade for free. You can buy anything. Back in the old days, if you wanted to own international stocks, it was expensive. To say nothing of the power of walking around with this stuff in your phone, it's really amazing. Software and technology give investors tools that are just so simple and so inexpensive and so effective. That's why I call this the golden age of investing. We can do things people dreamed about 25 years ago. Everybody gets second-by-second, tick-by-tick updates. You want to see how you're doing today, this week, month, year to date, the past 12 months — it's all right there. It's instantaneous. But please don't look at your portfolio tick by tick. It'll make you is the importance of having a financial plan and working with an adviser? There are ways to improve your life satisfaction with money. But a lot of people don't go about it that way. One of the ways that helps to get away from the money chase is that when you put a financial plan together, one of the things that ends up coming out of that process is the answer to: What is this money going to? Why do you want to put money in the market? Maybe you're saving for your kids' college, buying a house, or retirement. Now we know how much risk to take in order to achieve your goals. That draws down stress. When you put a financial plan together, you take as much risk as necessary, but not more, to achieve your goals. You're working with intentionality, you're working toward a purpose. If you're not saving toward a goal, you end up taking on too much risk. That's how people lose sleep at night. Having someone to talk you off the ledge and keep you focused on your plan is worth about 2% to 3% a year. That's a huge amount of returns that simply comes about because someone is preventing you from shooting yourself in the foot. And we, as investors, are our own worst enemies. If we can stop our bad behaviors, we're all so much better off. Read more: What is a financial adviser, and what do they do? Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including "In Control at 50+: How to Succeed in the New World of Work" and "Never Too Old to Get Rich." Follow her on Bluesky. Sign up for the Mind Your Money newsletter Sign in to access your portfolio
Los Angeles Times
06-03-2025
- Business
- Los Angeles Times
The results are in: During 2024, actively managed mutual funds again stank
Ordinary stock market investors — you and me, that is, not the big pension funds and other institutions — have two main choices about where to put their money: actively managed mutual funds run by stock pickers claiming to know the magic incantations for finding the best stocks, or passively managed index funds that merely replicate the markets themselves. Which category performs better? Easy question. It's index investing, which has smoked the active managers virtually since it was popularized by John Bogle and his Vanguard Group in the mid-1970s. The latest tally shows that 65% of actively managed U.S. large-capitalization mutual funds fell short of the benchmark S&P 500 stock index in 2024. That's worse than the 60% of funds that underperformed the benchmark in 2023, and a hair worse than the average rate over the last quarter-century. Those dismal statistics come to us via the latest annual SPIVA scorecard (the acronym stands for Standard and Poor's Index vs. Active). First published in 2002, the scorecard serves as what S&P asserts to be 'the de facto scorekeeper of the long-standing active versus passive debate.' That's accurate, up to a point. The debate isn't really about whether index funds perform better than actively managed funds — that debate is essentially over, and indexing wins, hands down. For years, the debate has been more about whether there are aspects of indexing that are bad for the markets, meaning the process of capital allocation. The virtues of index investing for the ordinary investor are indisputable. As financial planning guru Barry Ritholtz lists them in his forthcoming book 'How Not to Invest' (emphasis his), they include, aside from superior long-term performance, lower transaction costs and taxes, simplicity and fewer opportunities for bad behavior through silly mistakes. It's common for retail investors to buy high (say, when they catch the euphoria of a market surge) and sell low (say, when they're rattled by a market downturn), reversing the goal of buying low and selling high. 'Indexing gives you a better chance to 'be less stupid,'' Ritholtz advises. The majority of retail investors seem to have taken these points on board. By year-end 2023, according to Morningstar, assets under management at index funds had outpaced those in actively managed funds, $13.29 trillion versus $13.23 trillion. Back in 1993, when Morningstar first began tracking index-versus-active assets, active funds had $1.25 trillion under management, index funds a mere $21 billion. Before indexing took flight, it was easier to become enthralled by the records of such legendary stock pickers as Warren Buffett, John Templeton and Fidelity's Peter Lynch, and harder to notice that the vast majority of active managers turned in a few years of outsize returns, but that almost always their performances reverted to the mean, or worse. Even Lynch's prowess as a world-beating stock-picker was overstated. From 1977 to 1990, he built Fidelity's Magellan Fund from $18 million in assets to $14 billion, averaging an annual return of 29%, possibly the most successful such run ever. But it's often forgotten that for the first four years of his management, Magellan was a private investment fund for Fidelity's founding Johnson family. It wasn't opened to outsiders until 1981. By the end of Lynch's run Magellan was a behemoth struggling to eke out 'a razor thin margin of victory,' as investment commentator William Bernstein put it. Magellan actually fell behind the S&P 500 in two of Lynch's final four years of management. Among all U.S. actively managed stock funds, SPIVA reported last year, fewer than 5% of those that were in the top half one year were 'still in that position four years later.' Those who allowed their brokers to steer them into and out of individual stocks incurred commissions (on both ends of their trades) and taxes, especially on securities that they held for less than a year and therefore couldn't even claim the lower tax rates on long-term capital gains. Because index funds buy and sell stocks only when they're admitted into or dropped from their benchmark index, which happens relatively rarely, they minimize commissions and taxes. They also obviate the emotional component of investing, which so often can lead ordinary investors astray. The investment method people choose often depends on whether they see investing chiefly as a means to grow wealth or a way to get their gambling jollies as an alternative to going to the closest casino. Consider this example: Those who invested in a S&P 500 index fund at the beginning of January 2021 and held on through the end of 2024 scored a return averaging 13.6% a year; every dollar they invested grew to $1.67 over that timespan. By contrast, many of those who piled into the GameStop meme stock frenzy of January 2021 were down by as much as about 90% within days of the stock's peak, which was nearly $500. If they hung on through the end of 2024, they were still down by more than 60%. In other words, every dollar they invested shrank to less than 40 cents. That experience evokes a famous observation attributed to economist Paul Samuelson: 'Investing should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.' Success, however, has bred a backlash. As I've written in the past, concerns about indexing stretch across the partisan spectrum. Democrats and progressives are uneasy about the concentration of investment power in the hands of a few fund management firms that vacuum the vast bulk of investment dollars into their index funds, notably BlackRock, Vanguard and State Street. Republicans and conservatives express a narrower concern — they grouse that passive fund managers push a liberal agenda on corporate managements, especially in 'ESG' categories, the environment, social issues and corporate governance. Specifically, they've been exercised over the managers' asking their portfolio companies to assess the long-term financial implications of global warming. These are 'political' and 'non-financial' goals, 21 red-state attorneys general asserted in a nasty letter to index fund asset managers in March 2023. Never mind that the ramifications of global warming have become only more evident in many of these politicians' states over the last year or two, or that shareholders of some companies voted to urge their managements to pay attention to exactly these ramifications even before the red states asserted that they were irrelevant to corporate planning. Other issues related to the concentration of corporate ownership in the hands of a small cadre of fund managers have arisen. The 'Big Three' index managers — Vanguard, BlackRock and State Street — combined are the largest shareholder at 96% of the largest 250 publicly traded companies in the United States, according to a 2020 analysis. That study also documented that, 'on average, the Big Three control 20.1% of shares at these companies.' What unnerves investment experts about all this is that index fund investors squeeze passivity to the limit — they don't take pains to know what companies are actually in their funds' portfolios or how those individual companies are faring. They just follow how the index is doing. Another theory holds that the natural dynamic through which shareholders pressure their companies to compete better is destroyed when every major company in an industry is in the same index. In those cases, it's argued, the index fund managers don't care for one of their owned companies to compete with others they own in the same field. Whether that has had the projected effect is uncertain; reams of law-review pages and financial analyses have been filled with conjecture, but it's hard to nail down the effect. For all that, it doesn't seem likely that index fund investing will lose its allure for the investing public any time soon. Investing in individual stocks can be a full-time job, and most people have other full-time jobs. They can outsource their investing choices to active managers who all claim to have a unique skill, or cast their lot with passive managers who follow the indices but almost invariably outperform the stock pickers. Why would anyone act differently?
