The call is coming from inside the house.
No, this isn’t a twist from a horror movie – it’s a warning for your portfolio. Years ago, investors had to fend off cold calls from brokers pushing penny stocks, the kind of boiler room tactics made famous by fictional and real characters like Gordon Gekko and Jordan Belfort.
Today, scammy brokers are mostly relics of the past, outpaced by investor access to better information and technology. Yet while investors are more empowered, they still face a potential deceiver closer to home: themselves. The silver lining? This hard truth – that we are often our own worst enemy in our portfolios – drives investors to seek better ways to understand how the system really works.
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One of the clearest voices on exposing Wall Street‘s bad actors and empowering regular investors is Josh Brown, CEO of Ritholtz Wealth Management and a regular CNBC contributor.
Brown made his name with The Reformed Broker, a blog that’s been read by millions and is known for its brutal honesty and unapologetic style. Although the blog is retired, Brown’s new book, You Weren’t Supposed to See That, compiles his greatest hits with fresh commentary.
It’s a guide to understanding the forces that drive markets and the behavioral pitfalls that can trip up investors, while offering practical advice on cutting through the noise (or, in Brownian speak, the “bull****”).
With the release of his book, I had the opportunity to speak with Brown about what investors need to know today. Here are five hard truths that investors must hear, courtesy of Brown’s book and my conversation with him.
There are few excuses for being an uneducated investor
A lot has changed since Brown launched his blog 15 years ago. He pointed to one major trend: Investors are getting smarter. Not only has technology made it easier to manage finances, but access to quality information has exploded.
“Investors are getting their information from the internet,” Brown said, “and while they find nonsense, they also find wisdom, and they’re learning.”
Data supports this. Globally, young people are investing more than ever. And nearly 70% of Americans feel confident in their investing strategy, according to a Charles Schwab survey.
Brown has seen it with his clients: “When we have market-wide sell-offs, I have clients calling to put more money to work. That didn’t happen 15 years ago.”
No one knows what’s gonna happen – especially the “experts”
Wider access to information does have a downside: the spread of misinformation. Investors now face the challenge of separating fact from fiction, including “fake” financial news.
As someone on TV almost daily, Brown knows the influence media has on people, writing: “If the TV is on, remember everyone you see on there is doing their best but making guesses. No one can know what’s going to happen next for certain.”
His advice isn’t to distrust experts but to understand their motives. Quoting Charlie Munger – Warren Buffett‘s right-hand man – he said, “Incentives are everything.”
As for Brown’s strategy to vet the media, he says to ask: “What does this person want to achieve by participating in financial media?” and “How will they benefit from what they’re saying?”.
“Investors have more to fear from other investors than from the market”
It’s natural to fear the market, but Brown believes this fear is often misplaced.
He says one of the hardest truths for investors to accept is that “they have more to fear from other investors than from the markets.”
The real danger is people selling unrealistic promises. These can include promising stock market gains without the downside or guaranteeing returns or access to the next Facebook. “If you look hard enough, you will find the son of a b**** who’s gonna sell it to you,” Brown warns.
No risk, no reward
From a cold-calling broker to a media personality and CEO of a firm managing billions, Brown’s career is proof that taking risks pays off. And he believes this is essential for success in investing: “Taking risk ultimately is rewarded.”
“There’s no universe where you can eliminate all investment risk and still earn a positive return,” he says.
While risk is inherent, it can be managed. Brown cautions in the book against too much caution, though: “There is such a thing as too little risk. You can ‘protect’ a portfolio so much that you turn it into a bank savings account. That’s not investing. That’s fooling yourself.”
Time goes faster than you think
Perhaps the greatest risk we all take is believing there’s always more time.
One of the most affecting chapters in Brown’s book, “Scarcity,” explores the shortage of our most important asset: time. Brown writes about playing soccer with his son, who’s growing up fast, even as work pulls him away.
Any parent knows that kids don’t stay kids forever and that time passes quickly. “It’s one of those clichés that turns out to be even more true – before you know it, they’re going to grow up,” he said.
The same is true of investing. The earlier you start, the better. A CNBC survey found 40% of American workers are behind on retirement savings, and “not starting earlier” is their biggest regret.
If you’ve been putting off saving, the time to act is shorter than you think. As Brown puts it, “Time is scarce. There isn’t enough of it by half.”
For those considering how to align their financial lives with the lives they want to lead, Brown’s new book is time well spent.
