To The Moon

$S&P 500(.SPX)$

Hey everyone, welcome back to Rule #1 Investing. Today, we’re diving deep into five of the biggest investing mistakes I’m seeing people make in 2025, especially in light of the recent market turbulence and persistent volatility.

Look, I get it—these kinds of market conditions can be incredibly confusing. On the one hand, we’ve just come off two of the strongest years in recent memory. On the other hand, this shift we’re seeing now has a lot of investors scrambling, second-guessing, or worse—acting on emotion. So today, we’re going to break it all down. We’ll look at the mindset traps people fall into and, more importantly, how to avoid them with solid Rule #1 principles.

Setting the Stage: What’s the Market Environment in 2025?

Before we get into the mistakes, let’s zoom out and get some perspective on what’s been happening in the markets.

Over the past couple of years, we’ve seen phenomenal returns. In 2023, the Dow climbed nearly 14%, and in 2024, it added another 13%. Meanwhile, the S&P 500, supercharged by the Magnificent Seven—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—exploded to the upside, rising 24% in 2023 and 23% in 2024. Just staggering numbers.

But here’s the thing—these returns weren’t broad-based. Strip out those top tech names, and the S&P would’ve looked a lot more like the Dow. The broader market hasn’t been as healthy as those headline numbers suggest.

We’ve seen speculation explode in crypto, AI, meme stocks—you name it. And now, as we head deeper into 2025, there’s a noticeable shift in tone. After years of relentless optimism, the sentiment has turned murky. There’s still greed out there, but you can feel fear creeping in. People are unsure. And in that kind of environment, the risk of making bad investing decisions skyrockets.

So let’s talk about five common and costly mistakes investors are making right now—and how to steer clear of them.

1. The Trap of Hubris: When Confidence Becomes a Liability

First up is something that doesn’t just affect beginners—even pros fall for this—and that’s hubris.

Now, hubris isn’t just arrogance. It’s the belief, often subconscious, that you can’t lose. That your success is your own doing, not just the result of a rising tide. It’s dangerous because it leads investors to make bold bets without fully understanding the risks.

And ironically, this afflicts new investors more than you'd think—especially those who started investing in the middle of a bull run. When every stock you pick goes up, it’s easy to confuse luck for skill.

There are three major ways hubris shows up:

• Overconfidence: Believing your analysis or intuition is more accurate than it really is.

• Overprecision: Thinking you can predict things like growth rates or stock prices with pinpoint accuracy.

• Confirmation bias: Ignoring evidence that contradicts your thesis because you’re emotionally invested in being right.

Even experienced investors fall into this trap. I’ve made some of my biggest mistakes when I thought I understood a business inside and out—only to learn, the hard way, that I didn’t. That’s why staying within your circle of competence, as Warren Buffett puts it, is so essential. The moment you step outside it, chances are hubris is leading you there.

2. FOMO: The Fear of Missing Out

Next up is a powerful emotional driver: FOMO—the fear of missing out.

FOMO is a deeply human reaction. We all feel it. If your friends are getting rich off of Bitcoin, AI microcaps, or whatever the latest hot trend is, it’s hard not to feel like you’re being left behind. That emotional pressure to jump into whatever’s going up can be overwhelming.

In hot markets, it’s easy to start believing the rules don’t apply anymore. Maybe you see a stock down 20% in a week and think, “This is a once-in-a-lifetime buying opportunity!” But unless you’ve done your homework—unless you understand the business and its intrinsic value—you’re not buying a bargain; you’re gambling.

History is full of cautionary tales. Take Yahoo in 1999, during the dot-com bubble. It reached a PE ratio of 11,000. To justify that price, Yahoo would’ve had to generate revenue equal to the entire U.S. GDP. That’s obviously insane—but people kept buying because they didn’t want to miss out.

Eventually, reality caught up, the price collapsed, and a lot of people lost a lot of money. That’s the danger of FOMO—it causes you to abandon your principles and chase returns without regard to risk or value.

3. Recency Bias: Believing the Trend Will Continue Forever

Third on our list is a sneaky mental shortcut: recency bias.

Recency bias is the tendency to assume that what’s been happening recently will continue happening. If markets have been going up, they’ll keep going up. If they’ve been falling, they’ll keep falling.

It’s the same psychological trap casinos use when they display “hot streak” numbers. But just like in roulette, the odds haven’t changed—and neither have the fundamentals in investing.

In bull markets, this bias encourages people to buy overvalued stocks, believing they’ll keep rising. In bear markets, it makes them sell undervalued companies, thinking they’ll never recover. In both cases, the investor ends up doing the exact opposite of what successful investing demands.

Here’s the truth: markets move in cycles. Business fundamentals and stock prices eventually align. As Ben Graham said, “In the short run, the market is a voting machine. In the long run, it is a weighing machine.” If you believe this, you’ll buy when businesses are priced below their value—and that’s how wealth is built over time.

4. Overusing Leverage and Options: Betting Big, Losing Bigger

Fourth on the list is a more technical, but no less dangerous, mistake: using leverage and trading options without fully understanding them.

When markets are hot and everyone seems to be making fast money, investors often get tempted to “juice” their returns. They start using margin. They pile into risky options trades. They act like gamblers, not investors.

Now, I’m not saying options are bad. Buffett uses them, too. But he uses them in a way that makes him the casino, not the gambler. That’s a huge distinction.

What most people are doing today, especially on social media forums or trading apps, is the exact opposite. They’re throwing money at complex derivatives without understanding the downside. And when the trade goes south—which it often does—they're caught with catastrophic losses.

If your strategy is “heads I win, tails I go broke,” that’s not investing. That’s gambling. Rule #1 investing is about heads I win, tails I don’t lose much. That’s the mindset we want. No unnecessary risk. No leverage unless you truly understand what you're doing—and even then, it should be approached with extreme caution.

5. Leaving Your Circle of Competence

Finally, let’s talk about one of the biggest and most common mistakes: straying outside your circle of competence.

Your circle of competence is simply the area where you truly understand the business: how it works, how it makes money, what its future looks like, and what it’s worth. When you stick to businesses you understand, you can invest with confidence—even when prices fluctuate.

But when a bull or bear market takes over, many investors abandon that discipline. They chase hype. They buy companies they’ve barely heard of because they’re going up—or panic-sell companies they actually do understand because they’re temporarily down.

If you don’t understand the business, you won’t know what to do when things change. Is the drop an opportunity—or a warning sign? Is the rally sustainable—or pure speculation? You’ll be flying blind. That’s why this mistake often leads to the worst losses.

So What Do You Do Instead?

All right, let’s bring it home. How do you avoid these mistakes? How do you invest wisely in a volatile market like 2025?

The answer is to follow a robust, principle-based investing strategy—one that works in all market conditions. That’s what Rule #1 Investing is all about.

We focus on:

• Meaning: Do you understand the business?

• Moat: Does it have a durable competitive advantage?

• Management: Are the people running it trustworthy and competent?

• Margin of Safety: Is the stock priced far enough below its intrinsic value to protect you?

• And finally, we always use the Big Five numbers to assess financial health.

These principles aren’t new. They go back to Benjamin Graham and Warren Buffett, and they’ve stood the test of time through bull markets, bear markets, and everything in between.

Stick to this strategy. Don’t chase hype. Don’t act on emotion. And don’t let the noise of the market drown out the discipline of investing.

Thanks for sticking with me through this. If you found this helpful, leave a comment below—what’s the worst investing mistake you’ve ever made? Let’s learn from each other and keep getting better together.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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