Investors Lose Returns by Trading Too Much and Selling Under Stress

Barry Ritholtz reduces most investing advice to a behavioral command: put the phone down, stop trading. His starting point is not that investors lack access to information, but that access to information gives them more chances to make bad decisions.

Ritholtz’s own path into investing began on a trading desk after law school. He described the desk as “mayhem”: the same people could be making money one week and getting “shellacked” the next while believing they were applying the same process. The explanation that made sense to him was behavioral finance — decision-making under emotion, cognitive bias, and market stress.

That premise runs through his portfolio advice. Most people are not being beaten because the market is unknowable in some grand philosophical sense. They are being beaten because they trade too much, sell badly, panic at the wrong time, listen to too many people, and confuse stimulation with process.

Ritholtz’s answer is deliberately unglamorous: own a broad, low-cost index as the core of the portfolio, rebalance infrequently, and minimize the number of consequential decisions that require good timing, emotional control, and accurate forecasting.

He framed the statistical case plainly. In any given year, he said, less than half of active managers beat their index. Over five years, the number drops to “something like 21%.” Over 10 years, he put it at less than 10%. Over 20 years, he said, the list becomes “a handful of names you know,” such as Peter Lynch and Warren Buffett.

The implication is not merely that most people fail to beat the market. It is that many fail even to receive what the market was offering. “You can’t get alpha,” he said, “if you’re not at least starting with beta.” In his construction, the broad index is not the boring fallback. It is the baseline many investors never actually capture.

Ritholtz’s “Christmas tree” analogy is a way to contain the human desire to personalize a portfolio without letting that desire dominate the portfolio. The tree itself is the core: a broad, low-cost index exposure, often 50%, 60%, or 70% of the portfolio. The decorations are everything else — momentum, extra technology exposure, Japan, India, a sector bet, a theme, an individual name.

The decorations are not presented as necessary for returns. They are a concession to temperament. Investors like to have opinions. They like to talk about hot companies, startups, technology names, and tactical ideas. The point is to make those impulses survivable.

Shaan Puri compared the structure to a diet with a cheat meal: the cheat meal is not good for you, but it may keep you from abandoning the diet altogether. Ritholtz’s equivalent is what he calls the “cowboy account” — a portion of money reserved for higher-risk, more entertaining bets.

The important distinction is size. Ritholtz is not against all speculation. He is against letting speculation become the portfolio. If two-thirds of the money is indexed, the investor at least starts with the market’s return before trying to add flavor. But he was explicit about the odds: once investors decorate the tree, they are aiming to outperform, and “the odds are very much that you’re going to underperform.”

He tied the appeal of active tinkering to the business model of financial media. A simple portfolio — own diversified, low-cost indexes, rebalance every few years, wait decades — does not fill airtime. Markets are converted into constant conflict because content needs conflict. His metaphor was a gardening channel that plants a tree and lets viewers watch it grow. Then private equity buys the channel and everything must be dramatized: wrong tree, wrong water, planted too deep, not deep enough. The tree, meanwhile, “could not care less.” It just grows.

That is how he views the relationship between market commentary and broad indexing. The commentary produces urgency around an asset class that does not need the commentary to do its work.

He also placed the rise of indexing in a post-crisis context. Ritholtz said Vanguard and BlackRock together have about $25 trillion in assets and argued that the financial crisis was “the last straw” for many older individual investors. Before 2008–09, he said, Vanguard was under $1 trillion. He put Vanguard today around $11 trillion to $12 trillion and BlackRock around $13 trillion to $14 trillion. His reading: many investors over 40 lived through the crisis and decided to take their capital “home” to low-cost indexing.

The newer generation, in his view, has its own speculative outlets — DraftKings, Robinhood, and similar venues. The instruments have changed, but the behavioral pattern has not.

The cowboy account can produce spectacular outcomes. Ritholtz said clients have held Bitcoin before major runups, Tesla during its 2020–21 surge, and pandemic winners such as Teladoc, Zoom, and Peloton as those stocks exploded. The difficulty is not only finding a winner. It is deciding what to do after a position has grown large enough to change the investor’s life.

Ritholtz used his own Apple experience to illustrate the pain of selling well and still being wrong. He owned Apple when the iPod, not the iPhone, came out. He said the stock was around $15 per share, with $13 in cash, which made him think there was little downside. It tripled to $45, he sold, and he felt smart — before the stock went on to gain another 9,000%.

The inverse problem is failing to sell at all. Ritholtz pointed to Peloton’s former CEO as a cautionary story from his book. On paper, he said, the CEO had at one point been worth “two or three billion dollars,” then became heavily leveraged, bought expensive assets, and was forced to liquidate after Peloton crashed as the pandemic environment changed. Ritholtz described a $60 million East Hampton property that had to be sold and used the example to make a broader point: any stock can go to zero.

That risk is not evenly distributed. Ritholtz cited research by Hendrik Bessembinder at Arizona State Business School, saying that the “entire value in the market” comes from roughly 1% to 2% of stocks. The practical warning is that a beloved company that has run up already still has to be one of the rare long-term compounders to justify continued concentration.

Sam Parr brought up a prior interview with Lloyd Blankfein, former CEO of Goldman Sachs. Parr said Blankfein described loving to day trade, feeling anxious during a two-hour podcast because he could not check his phone, and putting in orders beforehand. Parr said Blankfein had indicated that something like 70% of his net worth was in his own picks, though Parr cautioned not to quote him exactly on the number.

Ritholtz reacted as if the number were directionally right and the behavior obviously wrong. If someone with a multibillion-dollar net worth is actively trading 70% of it, Ritholtz said, that is “the biggest risk-adjusted mistake” of his career. A few million dollars for trading entertainment would be one thing. The bulk, in Ritholtz’s view, should be structured around preserving what has already been won.

The deeper issue, he said, is that high-achieving people often cannot stop. Someone who has spent decades striving, saving, investing, accumulating stock options, and taking risk may find it hard to say, “I won.” But Ritholtz said that is often the advisor’s job: convince the person with a giant portfolio that the goal is no longer maximum exposure to more. It is the highest-probability path to the goals that actually matter.

If the goal is simply “more,” he warned, the person is likely to be disappointed in both the portfolio and life.

Ritholtz put special emphasis on selling because he sees it as more emotional than buying. Buying can be supported by spreadsheets, research, and a thesis. Selling is often driven by fear, boredom, impatience, regret, or the urge to free up cash for something shinier.

Panic selling is the most damaging form. Ritholtz said that when people sell into a market crash, “something like a third” never return to equities. He used the 2020 pandemic decline of 34% and the 2008–09 crash of 57% as reference points. The damage is not only selling low; it is missing the compounding afterward.

His illustration began with a million-dollar portfolio sold after a 57% decline, leaving roughly $450,000. He framed the consequence as missing roughly a 10x recovery if the investor never returned to equities; in the spoken example, he put the resulting value as “4.5 billion,” even though the arithmetic of the illustration is imprecise as stated. The point he was making was not a precise account balance. It was that cash yields, even when money markets later paid around 4% or 3.7%, do not compensate for missing a long equity recovery and may not keep up with inflation.

The same pattern appears among professionals. Ritholtz described “Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors,” a study by Klakow Akepanidtaworn, Rick Di Mascio, Alex Imas, and Lawrence Schmidt. The source displayed a screenshot of the paper page on S&P Global Market Intelligence, listing the paper title, the January 2019 posting date, the July 2021 revision date, and the authors’ affiliations with the University of Chicago, Analytics Limited, and MIT Sloan.

As Ritholtz summarized it, the study examined institutional buying and selling decisions. The clever test was to compare the securities managers actually chose to sell with random alternative sells from the same portfolios.

The random sells performed better. Ritholtz said the random alternatives outperformed the manager-selected sells by roughly 150 to 200 basis points, perhaps more. His interpretation: the buys were thoughtful and logical; the sells were emotional.

The prescription follows directly: make fewer decisions. If the weak point is not intelligence but decision quality under stress, the solution is not a more complicated process. It is a structure that reduces the number of times the investor must be right.

If the advice is to buy low-cost index funds, Ritholtz said many investors do not need to pay his firm a fee. His firm has long written publicly that investors can do it themselves: assemble a broad portfolio of low-cost indexes, manage behavior, stay out of the way, and check in once or twice a year. That is enough for many people.

The clients who hire help, he said, are paying for complexity management and discipline, not market-beating theatrics. They may have tax issues, estate issues, concentrated positions, founder stock, IPO stock, business-sale proceeds, or simply no interest in managing it all. Ritholtz called part of the value “organizational alpha” — coordinating the financial life in a way that may matter more to clients than whether performance is 50 basis points above or below a benchmark.

Direct indexing was his main example of complexity that can be worthwhile when it solves a specific problem. Parr summarized it as owning the components of an index directly rather than buying the index fund itself. Ritholtz agreed: the portfolio owns the components in similar proportions.

The point is tax-loss harvesting. Even in years when the market is up, Ritholtz said, 20%, 30%, or 40% of stocks may be down, and some are down substantially. If an investor owns a fund like VOO, the fund holds hundreds of positions. In a direct-indexed portfolio, an advisor can sell a losing component — for example, a small-cap biotech down 40% — replace it with a similar company in the same area, harvest the loss, and keep the portfolio’s behavior close to the index.

For people with large capital gains elsewhere, those harvested losses can be valuable. Ritholtz said the process may add 75 to 85 basis points annually in some circumstances. He also cited O’Shaughnessy research from the first quarter of 2020, when the market was down 34%, saying direct indexing produced more than 400 basis points of harvested losses while maintaining index-like exposure through the recovery.

He was careful not to universalize it. Direct indexing adds complexity and some cost. “Simple is better than complex,” he said, unless complexity solves a sticky problem. For most people, he does not think it is necessary. For founders, business sellers, heirs, IPO recipients, or investors with concentrated appreciated stock, it can be a practical way to reduce taxes without making a heroic market call.

Ritholtz also challenged Parr’s own allocation. Parr described himself as roughly 90/10 equities and bonds and said the bond piece was mostly emotional. Ritholtz said he did not think Parr needed even the 10% in bonds if he had 30 years before he needed the money, while acknowledging that the view was somewhat controversial. The exchange fit his broader framework: portfolio design is partly mathematics and partly managing the investor who has to live with it.

Ritholtz invoked Sturgeon’s law — “90% of everything is crap” — to describe financial information. He applied it broadly: television, print, social media, Substack, commentary, research, and opinion. His mother taught him never to take candy from strangers; he extends that rule to market commentary.

The issue is not only that much of the information is wrong. It is that evaluating information has a cost. Before reading someone unfamiliar, Ritholtz wants to know the person’s process, track record, temperament, and experience across cycles. Did they get lucky once? Have they lived through both up and down markets? Do they become hysterical every time the Nasdaq falls 4%? If so, he said, he has no room for them.

Zero Hedge was his example of a long-running adversary, though he described it more as a cross between Reddit and a blog than as a single voice. Robert Kiyosaki became a sharper target. Ritholtz said Kiyosaki has been bearish through much of the 2010s and highlighted a 2018 warning to get out of U.S. single-family housing. In Ritholtz’s telling, recent history made that a terrible call.

When someone defended Kiyosaki by saying he could not have known the pandemic and subsequent housing dynamics were coming, Ritholtz said that was exactly the point. He could not know the future. That is why he should not make forecasts.

Ritholtz connected this to a broader “humility problem” in finance. Forecasting invites confidence the evidence does not support. He also included himself in the category of people who get things badly wrong. He passed on Robinhood in 2014 at an $80 million valuation, dismissing an app that let millennials trade for free as “the dumbest” idea he had heard. He said Howard Lindzon made $100 million on that investment.

His conclusion was not that everyone else is dumb and he is smart. It was that he is “as dumb as everybody else,” but tries to start from an awareness of that fact. The human condition, as he put it, requires more humility about how little people know: little about the future, only partial knowledge of the present, and a memory of the past colored by nostalgia.

The source also showed Ritholtz’s 2016 Bloomberg/The Big Picture post “Nobody Knows Anything.” The visible text quoted screenwriter William Goldman’s line and used Hollywood misses — studios passing on “Raiders of the Lost Ark” and “Star Wars” — as an analogy for the futility of confident prediction. That visual supported the same point Ritholtz made aloud: expertise, experience, and incentives do not remove uncertainty.

That does not mean all sources are equal. When Parr asked for Ritholtz’s “10%” information diet, Ritholtz offered names while stressing that building one’s own list is part of the value. For broad economic analysis, he named Ed Yardeni as thoughtful, data-driven, constructive, and experienced. For market dynamics and structure, he named Sam Ro. For behavioral finance, Morgan Housel. For real estate, Jonathan Miller. For short selling, Jim Chanos. For Wall Street culture and psychology, Michael Lewis. For behavioral finance research, Richard Thaler.

He also mentioned his own colleagues — Josh Brown, Michael Batnick, Nick Maggiulli, Ben Carlson, Blair DuQuesnay, and others — while acknowledging the self-promotional risk of centering his own firm’s writers.

The standard is not whether a source is entertaining. It is whether the source has a defensible process, a useful domain, and the temperament to avoid turning every market move into apocalypse.

Several anecdotes returned to the same investing problem: the people and companies that later seem inevitable often looked strange, unproven, or uninvestable before the record existed.

Ritholtz named Richard Barton, the former Microsoft employee who founded Expedia and Zillow, as a figure worth studying. Parr and Puri framed Barton’s career as a repeated thesis: take messy, hard-to-access data and make it transparent, structured, and available. Housing data through Zillow, travel data through Expedia, workplace data through Glassdoor — different markets, similar playbook. Puri described Barton’s idea as giving “power to the people” by freeing data that existed but was not easily usable.

Ritholtz also singled out David Rubenstein of Carlyle, calling him possibly “the best human being” he has met. The business lesson he drew was not simply that Rubenstein was civic-minded, though Ritholtz described him convening expert briefings for lawmakers and later helping fund repairs around national monuments. Asked what made Rubenstein great as a businessperson, Ritholtz emphasized the ability to find areas ignored and undervalued by the market. Telecom in the 1980s, after deregulation, was not fashionable. Rubenstein’s skill, Ritholtz said, was identifying a place the market had missed — not “seeing around corners” so much as seeing what was already there and neglected.

Shaan Puri recounted Elon Musk’s brief exposure to finance. Puri described Musk, while young and working around Scotiabank, studying Latin American debt and Brady bonds. The bonds, according to the story Puri read aloud, were backed by the U.S. government; Musk believed they would be worth at least 50 cents on the dollar, while some traded as low as 20 cents. He thought the bank could make billions buying them. The bank rejected the idea because it already had too much Latin American debt. Musk interpreted that as a lesson in the irrationality of big banks and later credited the experience with giving him “a healthy disrespect for the financial industry.”

Ritholtz punctured the romance of the story without dismissing Musk’s later accomplishments. At the time, he said, Musk had no track record and was a rookie; why would anyone listen to him? He also corrected the claim that Musk started PayPal, saying he started a competitive product that merged with PayPal.

But Ritholtz’s larger point was generous: Musk does not need embellishment. Tesla changed the automobile industry. SpaceX changed aerospace, orbital access, satellites, and related industries. Musk’s accomplishments, in Ritholtz’s view, speak for themselves; the mythology does not need polishing.

The investor’s problem is that outlier selection is easiest after the outlier has already compounded. Ritholtz made the same point through Jim Simons. He studied math and science at Stony Brook, where Simons had been mathematics department chair before leaving to form Renaissance Technologies. Ritholtz called Renaissance the most successful hedge fund in history. But if someone had met Simons in 1979, he said, they might have thought he looked homeless and refused to give him money. The source showed a black-and-white photo of Simons with a cigarette in his mouth, underscoring the point: the future legend did not necessarily look like a future legend.

Ritholtz’s best-known forecast was his call around the housing crisis, but he described the experience less as triumph than as a year of looking foolish.

His early suspicion came partly from ordinary observation. His mother was a real estate agent, and in 2003, 2004, and 2005 they talked about how strange the housing market had become. The normal cycle, as he described it, is that an economy emerges from recession, expands, hires more people, raises incomes, and real estate benefits. In the mid-2000s, he saw the reverse: a “backwards real estate-driven economy.”

People bought homes, refinanced at lower rates, used home equity lines of credit, and spent housing equity to support lifestyles. Ritholtz tied this to middle-class workers not seeing raises above inflation for decades. Housing was not merely reflecting prosperity; it was financing consumption.

He then went looking for data. In 2006, he said, Carmen Reinhart and Kenneth Rogoff published a white paper that eventually became “This Time Is Different: Eight Centuries of Financial Folly.” Ritholtz summarized the paper’s finding this way: when a bubble is driven by credit, real estate drops 32% on average. He used that as a starting point to estimate what a real estate decline of that size would mean for corporate revenue and stock prices. Rather than model all 500 S&P companies, he looked at the 30 Dow stocks and “spitball[ed]” a Dow level of 6,800.

But markets do not reward being early in an emotionally comfortable way. Ritholtz said he spent about a year as “the dumbest man on Wall Street.” Through 2007, people treated the warning as obviously wrong. Even in the piece where he discussed 6,800, he said the market was still in an uptrend and experiencing multiple expansion. His view was that institutional traders should not short or exit stocks until the trend line broke — and that break took more than a year.

By early 2008, as the crisis intensified, Larry Kudlow began inviting him on CNBC weekly and then twice weekly. Before that turn, Ritholtz recalled appearing on CNBC with Peter Boockvar and discussing the potential downside while others “literally laughed” at them. Walking back to the office, he remembered thinking: either they were very right or very wrong, with little room in between.

Sam Parr connected this to Warren Buffett’s warning at the Allen & Co. conference during the dot-com era, as described in “The Snowball.” Buffett, according to Parr’s recounting, warned that even if the internet was transformative, the investable outcome for many internet companies could resemble the early automobile industry: thousands of companies formed around an obviously important technology, but only a few survived. Buffett tried to criticize the category rather than individual names, but the message still insulted an audience filled with dot-com winners.

Ritholtz answered with Richard Wyckoff, a technical trader from the early 20th century. He said Wyckoff’s “How I Trade and Invest in Stocks and Bonds” could be updated by substituting AI for internet, dot-coms for railroads, and Telegram for later communications technologies. The technology changes; the market cycle, hype, and human behavior repeat.

Ritholtz’s view of bubbles is not simply that new things get overhyped. He said they always do. More provocatively, he argued that this is “a feature, not a bug.”

He cited the book “Pop: Why Bubbles Are Great for the Economy” and used the dot-com era as the example. During the boom, companies such as Global Crossing and Metromedia Fiber spent enormous sums laying fiber. Ritholtz said the cost at one point was around $1,000 per mile. Then the dot-com collapse came, companies failed, and legacy cable and phone companies bought the fiber out of bankruptcy for pennies per mile.

That collapse ruined investors in the failed companies. But the cheap infrastructure enabled what came next. YouTube, Facebook, Instagram, and other bandwidth-intensive services would not have been as viable if the underlying “fat pipes” still cost boom-era prices. The bubble overfunded infrastructure; the bust transferred it to later users at distressed prices.

Ritholtz said similar patterns appeared in railroads, television, radio, electronics, semiconductors, the internet, mobile phones, and cars. New technologies attract capital because they are not burdened by legacy platforms and sunk costs. They can move faster, cheaper, and better. But the winner list is rarely obvious in the moment.

He refused to predict the AI winners. His point was the opposite: 20 years from now, the outcomes will look clearer than they are now. Looking backward at computers, he said HP, Gateway, and other companies once had billion-dollar valuations and “effectively went down to zero.” In mobile phones, he mentioned Ericsson, Nokia, and Motorola as formerly plausible leaders displaced by the iPhone and Android. His phrasing was loose across these examples: the central claim was not an exact bankruptcy history for each company, but that apparent category leaders can lose dominance, relevance, or investor value as the market’s eventual structure emerges.

The investment lesson is not to deny technological change. Ritholtz gave Musk, Tesla, and SpaceX credit for changing industries. Nor is it to assume every boom is empty. The lesson is that identifying an important technology is not the same as identifying the enduring equity winners at investable prices. A category can transform the world while many of its companies destroy capital.