Why Being Right Can Make You a Worse Investor

Investing involves risk. That’s a disclaimer we’ve seen a thousand times, and it happens to be true. Pick the wrong investment, and you can lose a lot of your nest egg, and that alone is reason to diversify.

Being Right Is Typically Performance Chasing

But being right can also be costly. I have people tell me things like:

• I don’t want international stocks because of wars overseas, and their economies are growing more slowly.
• Technology companies will grow far faster than other sectors, especially driven by artificial intelligence.
• I don’t want bonds because returns have been poor, and the Federal Reserve is likely to raise interest rates.

Though I happen to agree with all three of these statements, I’m not the only one who knows this. In reality, international stocks have outperformed over the past couple of years, energy rather than tech has been the best-performing sector so far this year, and bonds now have attractive nominal and real yields. While I don’t know future performance, I know the logic of performance-chasing is flawed. The wars may continue, tech revenues will almost certainly grow faster than other sectors, and the Federal Reserve will likely have a rate hike or two. But I wouldn’t avoid international stocks, overweight technology, or bail on bonds as I don’t know anything not already priced into the market. In other words, I won’t chase the crowd.

These are fairly simple examples of knowing something already known to the market. There are also some sophisticated examples. As I entered the personal financial planning field back in 2004, the Fama-French 3-Factor model was the rage as Dimensional Fund Advisors was gobbling up assets. In my opinion, Eugene Fama and Kenneth French were absolutely right that small-cap value stocks had a higher expected return than large-cap growth companies. But they also said it wasn’t a free lunch. It was compensation for taking on more risk.

They had explained what was likely to happen in the future, but many investors completely forgot the last part: the compensation for taking on more risk. Small cap and value were just two of the factors that ultimately were called smart beta. Not only was smart beta priced into the market, but also smart beta funds became overvalued and underperformed the rest of the market. I’m glad I embraced dumb beta.

Investing based on common knowledge is, at best, failing to understand that this knowledge is already priced into the market. At worst, it’s performance-chasing buying overvalued investments.

Knowing Something the Market Doesn’t Already Know

From the previous section, you might conclude that knowing something the market doesn’t already know is the ticket to earning higher returns. Sometimes that works; sometimes it doesn’t. You must also anticipate what others will think.

To illustrate, there is a famous experiment I’ve used in the continuing education classes I once taught. The experiment originated in a contest run by the Financial Times in 1997 by behavioral economist Richard Thaler (who won the Nobel Prize 20 years later). The contest awarded two business-class tickets on a supersonic flight across the Atlantic. The rules were simple:

Participants submitted a number between 0 and 100. The winner was whoever guessed closest to two-thirds of the average of all numbers submitted. If someone thought the average number would be 50, then logically they would guess 33. But knowing others would logically guess 33, they should guess 22. This logic should continue until the answer essentially reaches zero. The winning guess was about 13.

This illustrates that logic and being right are two different things. While a number close to zero was the right answer from a logic standpoint, it wasn’t the winning number.

Does this happen when it comes to investing? Doesn’t the value of an investment eventually come back to the net present value of the future cash flows? Maybe, but not always, as economist John Maynard Keynes famously said, “The market can stay irrational longer than you can stay solvent.”

If you want a concrete example, let’s look at the year 2020. Imagine that back in December 2019, you knew a world-class epidemiologist who told you a virus would spread globally and collapse the global economy, including the US. I confess if I had known this, I would likely have sold all my equities and gone to the safety of Treasury bills. I’d have a bunch of regret through mid-February but look pretty brilliant a month later. Maybe I’d have been celebrated as a brilliant investor bragging in the media about why I knew this future. In the end, however, I’d have missed out on a positive 21% return for the year, as measured by the Vanguard Morningstar Total Stock Market ETF VTI

. Was it an aberration and did stocks eventually tank? No. As of Sept. 15, 2026, VTI has gained about 125.9% from the end of 2020.

I was right, as I would have known something critical that the market didn’t know. Yet, I’d be a lot poorer and would have likely returned to the market only after a lot of the gains had already been made. I could give you other examples of a crystal ball predicting the Ukraine-Russia war, the Iran war, inflation, and so on, resulting in me being right and a whole lot poorer.

A Better Way To Invest

In his upcoming book, The 7 Virtues of Great Investors: How to Master the Markets by Mastering Yourself (Simon and Schuster, January 2027), Jason Zweig notes that extraordinary investors like Warren Buffett ask themselves, “What do I know, and how do I know it?” Zweig told me, “They don’t stop there. They also try to determine whether the rest of the market already knows it, and they attempt to anticipate what other investors will be thinking in the future.”

But I can tell you that I’m no Buffett, and the odds are you aren’t either. So, I recommend rules-based investing by first owning the entire market with the greatest diversification and lowest costs and then having the discipline to stick with an appropriate asset allocation.

It’s OK to have a little fun by carving out less than 5% of your portfolio for what I call a gambling portfolio. The biggest gamble, though, is not that you lose that money; rather, it’s that you do quite well and think of yourself as the next Buffett and start stock-picking with the rest of your portfolio.

So, the next time you get that irresistible urge to make a major move based on something you think you know, let it pass. Remember that even if you are right, you may still end up making a costly move.