Barry Ritholtz’s new book, How Not to Invest, offers investors a cautionary tale—many of them, in fact.

Ritholtz has been in and around the investment industry for more than 30 years—as a trader, a journalist and, most recently, as cofounder of a wealth management firm.

In short, he is no stranger to Wall Street. His conclusion? It can be a minefield.

Bad actors like Charles Ponzi and Bernie Madoff are well known. The reality, though, is that they represent just one of the many types of financial risk we might encounter. To help investors navigate the “bad ideas, bad numbers and bad behavior” that pervade the world of investing, How Not to Invest represents a field guide of sorts.

These are four of the most common pitfalls Ritholtz identifies:

1. The media. Research dating back to the 1980s has shown—counterintuitively—that when investors have access to more information, they tend to make worse decisions. Financial news, in other words, can be detrimental. Why? In large part, it’s because people, understandably, feel that they need to take action when they receive new information. So they’ll tend to place trades in response to new news. But since no one has a crystal ball, this increased trading tends to be counterproductive.

This phenomenon has been documented for years. But because of the number of news outlets today, Ritholtz argues that the problem has gotten worse.

Among the ways that news can lead investors astray: “denominator blindness.” In presenting financial news, commentators often present numbers out of context, with the result that the news ends up seeming more dramatic and worse than it really is.

As an example, How Not to Invest cites a news item about Amazon laying off 18,000 workers a few years back. That number sounds big, but it leaves out the denominator, which would provide context: Since Amazon employs about 1.5 million people, a layoff of 18,000 people would translate to just 1% of its workforce. As a result, it isn’t a meaningful commentary on the health of the company.

Similarly, the media often exaggerate stock market news. Back in 1987, when the market fell 508 points in one day, it was an unprecedented event, translating to a 22% decline. But today, with the Dow close to 47,000, a 508-point drop would translate to an almost insignificant decline of just 1.1%.

The lesson: It’s okay to follow the news, but we need to recognize that writers—especially headline writers—tend to have a bias. To grab readers’ attention, they need to make statements that sound like big news. So always ask, what’s the denominator?

Ritholtz puts Wall Street strategists in the same category as attention-seeking financial journalists. “I have met many of these people,” he writes. “Their general advice is for entertainment purposes only. Their forecasts are nothing more than marketing.”

2. Mindset. Seventy-five years ago, Benjamin Graham noted the importance of investor psychology: “The investor’s chief problem—and even his worst enemy—is likely to be himself.” Ritholtz argues that this also may be a bigger issue today than it was in the past. As sophisticated and as logical as we may try to be, ultimately, “we are social primates,” he says. That makes it very hard to ignore what everybody else is doing, especially when the crowd appears to be going in a different direction.

Clifford Asness, a hedge fund manager and author, has commented on this phenomenon. He argues that social media has made the market less efficient in recent years. The meme stock craze of 2021, for example, was driven by a YouTuber in his basement. He and his followers helped drive up the prices of certain stocks. That, in turn, made it harder for observers to stay on the sidelines. That drew in new investors who, in turn, pushed prices up further.

That kind of thing couldn’t have happened as easily in the past. But today it’s another pitfall for investors to guard against.

3. Opinion. How can we combat the twin effects of media bias and investor psychology? Ritholtz notes that we all tend to live in “belief bubbles” with others who share our views—yet another effect of social media. To break out from these silos, we need to actively seek out opposing points of view. Just as Charlie Munger would urge investors to “invert” a hypothesis to pressure-test it, Ritholtz suggests that we intentionally follow commentators we disagree with.

I do this myself. Michael Burry, for example, is an investment manager and protagonist of the book The Big Short. He’s an advocate of active management and has issued dire forecasts about index funds. While I disagree, I listen carefully to his arguments. I also follow the proponents of bitcoin, of modern monetary policy and of various other ideas I disagree with.

4. Data. A key challenge in the investment world is that the data can sometimes be misleading as well. Consider market valuation metrics. For years, investors have fretted that the market is expensive, Ritholtz notes, and yet, it’s continued to rise nearly every year since 2009. “Bull markets tend to go longer and further than anyone expects,” he’s noted. As a result, metrics like price-to-earnings ratios aren’t terribly useful.

“If you only buy stocks when they’re cheap,” Ritholtz says, “you get these narrow windows every decade or so.” The solution? Investors should simply dollar-cost average over time and take the long view.

To be sure, there are many potential potholes on the investment landscape. The good news, though, is that Ritholtz also includes a prescription for how investors should invest, and it isn’t complicated. It’s telling, in fact, that this is the shortest section of the book. As Charley Ellis first pointed out 40 years ago in Winning the Loser’s Game, investors don’t need to do anything sophisticated to succeed. We don’t need to find the next Apple or Nvidia. Instead, the most important thing is simply to make fewer missteps. Avoid the potholes, and the path to success is surprisingly simple.​