5 Investing Mistakes Lawyers Make (And How to Dodge Them) (Ep. 145)

Written By Adedayo Adekunle

Are you a law firm owner looking to grow your wealth through smart investing? You’re not alone. But even the best legal minds can fall into common traps when building an investment portfolio. The good news? With a straightforward, disciplined approach, you can sidestep these pitfalls and set yourself and your firm up for long-term success.

Let’s dive into the five key investing mistakes lawyers make and practical strategies to help your money work harder for you.

1. Overconfidence: Thinking You Can Outperform the Market

It’s easy to believe your hard-earned expertise will translate directly to the stock market. But research shows that the more you trade, the worse your returns. Overconfidence leads investors to believe they can consistently pick winners or time the market. The reality? Most people and even professionals cannot do that.

The Fix: Adopt a buy-and-hold strategy with a diversified portfolio. Resist the urge to chase hot stocks or trends. The market rewards patience and discipline, not guesswork.

2. The Illusion of Control: Believing You Can Predict Outcomes

Business owners are used to taking charge, but in investing, you simply can’t control the market. Studies show people often believe they have more influence over investment outcomes than they actually do, leading to risky decisions.

The Fix: Focus on what you can control such as your savings rate, asset allocation, and risk management. Accept that luck and timing play a role, and don’t stake your financial future on “sure things.”

3. Herding: Following the Crowd

The pressure to follow what everyone else is doing is strong especially when it seems everyone is getting rich quick. However, history is littered with market bubbles where the crowd got it wrong: think the dot-com bubble, the housing crisis, and meme stocks.

The Fix: Stick to your investment plan, backed by data and your specific goals. Don’t buy because it’s the “talk of the moment.” Remember, crowd wisdom rarely leads to lasting wealth.

4. Loss Aversion: Holding On to Poor Investments

Losses sting more than gains feel good. This emotional bias keeps many holding on to bad investments, hoping they’ll rebound. In business, it’s like keeping a poorly performing employee or an ineffective marketing strategy just to avoid admitting a mistake.

The Fix: Set clear criteria for when you’ll cut your losses and follow them. Review your portfolio (and your business expenses) regularly. Trim what isn’t working so you can reinvest where it counts.

5. Pride and Regret: Refusing to Admit Mistakes

No one wants to admit defeat, but letting pride or the fear of regret drive your money decisions can sabotage your wealth. This bias leads to missed opportunities and persistent investing errors.

The Fix: Embrace a learning mindset. Assess your investments with honesty and let go of what’s not serving your long-term goals.

Practical Steps for Law Firm Owners

Here’s how you can avoid these pitfalls and become a more successful investor:

  • Have a disciplined, long-term plan. Invest in diversified funds like the S&P 500 and rebalance only when needed.

  • Be wary of “hot tips” and “foolproof” schemes. If it sounds too good to be true, it probably is.

  • Don’t chase IPOs or trendy stocks. Studies show these usually underperform over time.

  • Partner with experts who focus on proven strategies. Look for advisors who prioritize your best interests, not stock-picking or market timing.

Take Control of Your Financial Future

At The Lawyer Millionaire, we specialize in helping law firm owners like you grow wealth the right way. Our approach is built on transparency, long-term planning, and business-smarts—no confusing jargon or empty promises.

Ready to get started?

  • Book a call today to review your portfolio and discover tailored strategies to grow your law firm and personal wealth.

  • Join our Lawyer Millionaire community and connect with other law firm owners committed to business excellence and financial growth.

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Transcript:

Darren Wurz [00:00:00]:

Studies show that the more you trade, the worse you do. Today, we're exploring psychological reasons why humans make bad stock market traders and how you can do better. What if I told you that the biggest threat to your investment portfolio isn't the stock market, it's you. Hey, friend, and welcome to the Lawyer Millionaire podcast. I'm excited that you are here today and I'm here with you in the studio. So come on in, Come on into the studio and, and let's have a chat about stock market investing. You know, this is kind of the culminating topic, almost of our current book club. Read this quarter in the Lawyer Millionaire Masterclass book club.

Darren Wurz [00:00:44]:

We're reading a random walk down Wall street. And if you haven't been following along with us, don't worry, it's not too late. Go grab your copy. This is really one of the best books on investing that money can buy. I lie not to you. So we've been taking some lessons from here this quarter and talking about it in our book club, which, by the way, if you're not a member of the Masterclass Book Club yet, you owe it to yourself to join. It's a great time. We have a great community of over 100 law firm owners.

Darren Wurz [00:01:17]:

And you'll get to read some incredible books and connect with some really, really incredible people and grow your network, become a better business leader, grow your revenue, all of that. So check out the show notes for the link. Today we're talking about behavioral finance. What is behavioral finance? Well, you know, people are not as rational as economists assume. Now, you may recall if you've been listening to the show on a previous episode, in this, along with this book, you know, we talked about the efficient market hypothesis. The efficient market hypothesis says that it's not possible to consistently outperform the market or to pick winning stocks or pick stocks that are undervalued and experience a gain on the market ahead of the crowd because markets are efficient. And what that means is that you can't find mispricings, you can't find stocks that are undervalued in hopes of them becoming overvalued. Maybe you once could when stock markets were less efficient.

Darren Wurz [00:02:29]:

But today, stock markets are highly efficient. It's impossible to take advantage of information of patterns of all kinds of different things to gain an edge. But we also talked about the biggest bubbles in history. We talked about Wall Street. We talked about in the 1920s, how stock prices were going higher, higher, higher, irrationally high, way, way out of line with any kind of rational valuation to the Point where they eventually crashed and burned and you had the Great Depression and all of that that ensued. And that was not a one time thing that, you know, history is littered with examples. The dot com bubble and the mortgage housing crisis and you know, the meme stocks over and over and over again. There's always a bubble somewhere.

Darren Wurz [00:03:30]:

So how do we reconcile these things? How do we reconcile the fact that markets are efficient and yet they are highly irrational at times? Behavioral finance theorists believe that market prices are highly imprecise. In other words, they're always incorrect. However, it's impossible to know in the moment whether stock prices are too high or too low. And behavioral finance theorists also posit that irrational trades tend to be correlated. So efficient markets would argue that yeah, some investors are probably irrational, but they cancel each other out. This guy thinks this stock is worth more, this guy thinks it's worth less, and in the markets it all is a wash. Well, what we actually find is that people tend to behave similarly. And so you get these waves, you get these market surges and you get these market crashes.

Darren Wurz [00:04:29]:

And so that's what we mean is that irrational trades tend to correlate and you can't count on arbitrage to bring prices down. What is arbitrage, you ask? Okay, so arbitrage is basically a fancy word that means that big market players are going to act to balance markets. Like hedge funds for example. Well, how did that turn out with the hedge funds that were betting against GameStop in 2021. Ow. So you know this is going to happen. And by the way, you know, institutional traders tend to just go along with the flow. They don't bet against the market.

Darren Wurz [00:05:11]:

Usually there's a few outliers, there's a few that do, but by and large they go with the market. Hedge funds were net positive owners of dot com stocks in the dot com bubble and net sellers in the subsequent crash. No one's getting it right. Okay. And that's why this matters for you, right? First of all, you know, just to become a better investor, this is important to know about. But more importantly, I am passionate about this because. Because you are a target. Yes.

Darren Wurz [00:05:45]:

You my friend, if you're listening to this show and you're a law firm owner, you're a target. May you're, you're a high income earner and high income earners are high stakes. They're targets. You're a target of bad actors. And let me tell you, there are a lot of bad actors today. People that are making up all kinds of things. You See it in social media. You see it all over the place.

Darren Wurz [00:06:05]:

You see people being conned into financial schemes and abuses and, you know, getting swayed by people who think they can time the market or pick stocks. And if you're making a high income, you are a target. And I got news for you. Even the professionals are prone to these biases. That's right. Your financial advisor is prone to these human behavioral biases, just like you. And by the way, these same biases show up in how you run a law firm. So it just so happens that becoming a better investor will make you a better investor, business leader.

Darren Wurz [00:06:47]:

And that's what's probably forefront on your mind. Let me give you a little story. There's a guy named Bill Wang, Maybe, maybe you remember him. 2021, not too long ago, he was the founder of a fund called Archegos or Archegos Capital. He built a fortune of $20 billion using extreme leverage. You may remember the story. It was splashed across the headlines. He used borrowed money, okay? Margin leverage.

Darren Wurz [00:07:19]:

This is how most of these stories end badly, okay? He used borrowed money to make concentrated bets on a handful of stocks. Okay, okay, right there. Hold the phone. You're doing all the wrong things. Concentrated stocks, a handful. You're not diversified. You're betting on margin. We know how this story is going to end.

Darren Wurz [00:07:38]:

Well, at its peak, he had more than $100 billion in market position. So this worked really well. He was good. He was great. He was doing really, really well. And as we have mentioned on this show before, there are people who do time the market and they do really well. The problem is they can't do it consistently. And the number of those who do is what we would expect.

Darren Wurz [00:08:07]:

Right? The performance of traders follows a bell curve distribution, which is the same exact pattern that we would expect from random chance. And with random chance, as you know, in a bell curve distribution, most of the outcomes fall in the middle. And you have some way on the negative side, and you have some way on the positive side. And those are called outliers. But they do happen. Now, to take an outlier and base your entire investment thesis on an outlier is a big logical fallacy. That's a big mistake. Anyway, stocks dipped, margin calls cascaded, his fortune vanished.

Darren Wurz [00:08:49]:

Get this in 48 hours. Vanished, vanished, gone. All the billions of dollars, gone. And top it off, he was arrested and charged with fraud. So this is important. Okay, what are, what are the behavioral biases? Okay, I'm going to give them to you. There are five. Five behavioral biases.

Darren Wurz [00:09:13]:

Biases that we are prone to as human beings. That you are prone to. And here's the kicker. You don't even realize it. You don't even know it. And it's like, I can't think of a great example. But, you know, it's like. It's like, you know, you have a problem and you don't even know it.

Darren Wurz [00:09:30]:

Right? It's like trying to convince an alcoholic that he's an alcoholic. We have this problem and we don't even realize it, and we don't want to even admit it. The first one is overconfidence. Overconfidence. Overconfidence is the tendency to think that we can beat everyone else, that we can do better than everyone else. Okay? That we can do better than the crowd. And in markets, it's the tendency to think that we can outsmart the market. And by the way, guys, I got bad news for you.

Darren Wurz [00:10:05]:

It's worse with men in general. In a study, economists examined individual accounts at a brokerage firm and found that the more individuals traded, generally the worse they did. Wow. The worst they did. Because here's what happens. The more overconfident you are, the more you tend to trade. And this is another thing. They found men tend to trade more than women.

Darren Wurz [00:10:33]:

So women tend to trade less. They tend to be less overconfident when it comes to the markets. They tend to have better investment returns. So let your wife do the investing, okay? And then another study of Robinhood clients found that the most frequently bought stocks had negative absolute and relative returns. They lost an average of 5% over the subsequent month relative to the market. So does it pay to buy the stocks that everybody's talking about? Generally, no. A related bias, and this isn't another one, but a related concept is this idea of hindsight bias. And that is that everything looks better in hindsight.

Darren Wurz [00:11:18]:

Right. And the reason for that is our brains are biased to remember good outcomes and not remember bad ones or rationalize away bad ones. And so we tend to remember the good stocks that we picked. Oh, I made a killing in this one. But we tend to forget the ones that were losers, or we tend to rationalize them away. Oh, that was just because. Blah, blah, blah, blah. How does this connect to you as a law firm owner? Well, overconfidence can rear its ugly head.

Darren Wurz [00:11:49]:

As a business owner as well as business owners, we tend to be very overconfident. And we tend to think we can outwork, outsmart, outthink anyone. And any problem, it leads us to put more on our plates than we should. It leads to a failure to delegate. It leads to burnout and stress, and it leads to taking risks that we maybe shouldn't take. Right. It leads to this growth epidemic. I'm going to say I'm going to use those words because everybody wants to have a $10 million business these days.

Darren Wurz [00:12:30]:

And the reality is only a handful of us are going to get there because there's a combination of things. Some that are in your control and some that are not. There's a good deal of luck that comes into creating a highly successful business. Okay, that's, number one, overconfidence. And number two, I'm glad we talked about the connection to law firm ownership because this leads right into it, and it is the illusion of control. Very related to overconfidence is the illusion of control. Number two, the illusion of control is it's a bias of judgment where investors are convinced that they can control outcomes. As human beings, we're often convinced that we can control things that are completely beyond our control.

Darren Wurz [00:13:16]:

Whether it's, you know, crazy things like, I don't know, completely unrelated events, every time I get a cold, there's a rainstorm, or, I don't know, things that could be completely crazy like that, or things that are not as crazy, but this is a real human tendency, and it's a little bit freaky. So I'm going to actually read you a little story, and this is going to blow your mind. Okay? Each year, a statistic, and this is right from our book that we're reading each year, a statistics professor begins her class by asking each student to write down the sequential outcome of a series of 100 imaginary coin tosses. One student, however, is chosen to flip a real coin and and chart the outcome. The professor then leaves the room and returns in 15 minutes with the outcomes waiting for her on her desk. She tells the class that she will identify the real coin toss out of the 30 submitted with just one guess. With great persistence, she amazes the class by getting it correct. How does she perform this seemingly magical act? She knows that the report with the longest consecutive streak of heads or tails is likely to be the result of the real flip.

Darren Wurz [00:14:37]:

The reason is that when presented with a question like which of the following sequences is more likely to occur? Heads, Heads, Heads, Heads, heads, tails, tails, tails, tails, tails or heads, Tails, heads, tails, heads, tails. Despite the fact that statistics show both sequences are equally likely to occur, the majority of people select the latter more random outcome. They thus tend to write imaginary sequences that look much more like heads, heads, tails, tails, heads, tails, heads, tails. Than heads, heads, heads, heads, heads, tails, tails, tails, tails, tails. Huh? This goes to what we think randomness should look like, right? And we talked about this, we talked about, when we talked about technical analysis, right? Our, our, our tendency, our proclivity to find patterns where none exist. And yes, randomness can produce patterns and it can look like it's predictable when it's actually not. And you know, those streaks happen in markets. A series of streaks of positive movements.

Darren Wurz [00:15:45]:

And we'll think, oh, the market's on a trend, there's an uptrend. Well, here's the thing. Streaks and trends eventually end. And we have a concept called reversion to the mean. Psychologists have long identified the tendency for individuals to be fooled by the illusion of control. I'm going to show you, I'm going to read you one other study here, and that is this. In one study, subjects were seated in front of a computer screen divided by a horizontal line with a ball fluctuating randomly between two halves. The people were given a device to press to move the ball upward, but they were warned that random shocks would also influence the ball, so they did not have complete control.

Darren Wurz [00:16:30]:

Subjects were then asked to play a game with the object of keeping the ball in the upper half of the screen as long as possible. In one set of experiments, the device was not even attached, so the players had absolutely no control over the movements of the ball. Nevertheless, when subjects were questioned after a period of playing the game, they were convinced that they had a good deal of control over the movement of the ball. I love that it's so mysterious, right? The illusion of control. Boy, our minds do play tricks on us. And how does this connect to you as a law firm owner? Well, we often have this illusion of control in our business, and it leads to the same things, burnout and stress, because we think we're responsible for everything. And you know what? A lot of success in business is pure luck. Being in the right place at the right time.

Darren Wurz [00:17:24]:

When preparation meets opportunity, we tend to think if we just work harder, we can control the outcome. But we need to respect luck and give luck the time it needs to operate in our lives. Put yourself out there and let the opportunities come to you. It's less about controlling the outcome and it's about doing the activities that will generate success. Okay. Bias number three is herding. You may have heard of herding. Herding like a herd of cattle, right? The wisdom of the crowd.

Darren Wurz [00:18:00]:

The wisdom of the crowd is great in creating an efficient market. But the wisdom of the crowd often goes off the rails. Too high up or too far down. Generally it works, but sometimes it can go way off. And an even further aspect of this is groupthink. So groupthink takes herding to another level. But groupthink is a great example of hurting. In groupthink, members of a group reinforce each other into believing some incorrect point of view.

Darren Wurz [00:18:34]:

And there are so many studies that have shown this. Okay, let me just read you one here. It's so, so, so, so fascinating. Okay, let's see. Here it is. The lines. Okay. Sociologist named Solomon Asch was one of the first to study how group behavior may lead to incorrect decision making.

Darren Wurz [00:18:54]:

During the 1950s, Asch conducted a famous lab experiment. A group of participants was asked to answer a simple question that any child could answer correctly. The subjects were shown two cards with vertical lines, such as the cards shown below. The card on the left showed one. The subjects were asked which line on the card on the right was the same length. Seven subjects participated. But Asch added a diabolical twist to the experiment. In some of the experiments, he recruited six of the seven participants to deliberately give the wrong answer and to do so before the seventh participant had a chance to express an opinion.

Darren Wurz [00:19:30]:

The results were astonishing. The seventh participant would often give the incorrect answer. And he goes on to say, it's not only about that. The social pressure. What they did is they looked at the brain while this was happening. What they found is that the area of the brain related to spatial awareness was what was being triggered. And so what this means is that not only can peer pressure affect our decisions and herd behavior affect our decisions, it can also affect our perception of reality. So it's very important to stay grounded.

Darren Wurz [00:20:01]:

Don't do something else just because everyone else is doing it. And there's so many examples of this in business, copying someone else's marketing, fads, etc. Build on what works for you and use data to support it. The fourth bias is loss aversion. Loss aversion means that losses hurt more than gains. Well, duh, but in magnitude. So they've actually quantified this. The pain of a loss is two times more than a similar gain is pleasurable.

Darren Wurz [00:20:37]:

Right. So a 1% loss, the pain from that, the emotional pain from that is far more than a 1% gain is pleasurable. The magnitude of the feeling the loss feels stronger than the gain. Now, what this leads to in investments is we hold on to investments that are bad investments, hoping they'll come back. Boy, I bet you have some examples of this in your law practice. Hanging on to bad clients. Hanging on to poor performing team members. Hanging on to that marketing.

Darren Wurz [00:21:13]:

Hanging on to that SEO company. That's, that's not delivering good leads. Yeah. Ineffective strategies. How often do we hang on because of our loss aversion? Because cutting it loose would mean to admit a loss. Just hang on a little bit longer. This is going to turn into a great win for me. And maybe it won't.

Darren Wurz [00:21:36]:

Okay, the last one is pride and regret. Pride and regret affect our decision making very strongly. We don't like to admit defeat. We are hesitant to sell losers thinking they'll come back or we'll regret it if we miss out. Very similar to loss aversion. We don't want to admit when something isn't working. Friend. What in your law practice, in your business isn't working? As we go into the end of the year here, what are you doing in your business that's just not working? That's not serving you? That's a great question to ask.

Darren Wurz [00:22:13]:

Cut it loose. Let's go deeper. Let's go back through these and let's talk about how you can be a great, highly successful investor by avoiding these psychological biases. How do you avoid herd behavior? Have a disciplined strategy and stick to it. Fund inflows are highest at their peaks and fund outflows are highest at their bottoms. The crowd is wrong, my friend. But it's impossible to know in the moment whether the how. How wrong the crowd is or if the crowd is wrong.

Darren Wurz [00:22:41]:

But the crowd is often wrong. Number two, avoid over trading. Stop making changes. Stop trading in your account. A better strategy would be to buy and hold. Buy and hold. Hodl. If you do trade, okay, sell the losers, not the winners.

Darren Wurz [00:23:02]:

Cut your losses and let your winners run, as the old adage says. Because those winners can run for a long time and the losers can stay losers for a long time. And the best winner, my friend, is the S&P 500. A nice, largely diversified strategy. Get all 500 of the largest companies all in one shot. And lastly, avoid investor tricks. Here's a few investor tricks. IPOs.

Darren Wurz [00:23:36]:

You know the only one who benefits from IPOs? The investment bank and the original shareholders, probably. Numerous studies, study upon study upon study has shown that in general, IPOs lose money during the first few years. They're not successful investments now. Sure, maybe they. Maybe they are unicorns. Maybe they go on to become unicorns. Google was once an ipo. But Google is one of thousands, right? So take it with a grain of salt.

Darren Wurz [00:24:10]:

Your odds of picking the next Google IPO are very low. Friend number two, stay cool to hot tips. I know your aunt or your uncle, they've got a hot stock that they want to tell you all about. These are overwhelmingly likely to be the worst investments of your life. And don't take hot stock tips from financial advisors either while we're at it. They don't know jack shit either. And I can say that confidently. I can say that confidently on the back of science, on the back of study after study after study that demonstrates and proves this.

Darren Wurz [00:24:47]:

If you have a collect, if you have a portfolio that is stock based and it's not well diversified and you're working with someone who's picking stocks for you, this may work for a time, but there will come a time when it doesn't work. And more than likely it hasn't been. Number three, don't trust foolproof schemes. Oh my God, there are so many nowadays. Open up social media and everybody's a freaking life insurance salesman trying to pitch indexed universal life or cash value life or everybody's a day trader doing a TikTok live about how to spot wedges and heads and shoulders and blah blah blah blah blah. Okay, if 15 year old Johnny is such a stock whiz, why is Wall street not picking him up? Why is he not running the biggest hedge fund on Wall Street? I'm just asking for a friend. And more importantly, if something's too good to be true, it probably is. You know, if some guy is telling you that he can outperform the market, don't believe him.

Darren Wurz [00:25:50]:

Maybe he will, maybe he'll be one of the 1% that do. But there's a 99% probability that he won't and that you will lose money or you won't reap from the generous rewards that the market provides. And worse than that is it might be a scheme. Bernie Madoff was the largest Ponzi scheme ever. He offered safe returns in the neighborhood of 10 to 12%. Nothing outrageous. And don't count on regulators to help you because even the SEC didn't act when it was warned. It took a long time.

Darren Wurz [00:26:30]:

You know, I've been there, my friend, my friend, I've been there. I've done it. I've made the mistakes. So I'm here to tell you not to make the mistakes. I've tried to time the market. I have tried out countless market timing strategies, newsletters, you know, systems. I've tried them. I've tried almost all of them.

Darren Wurz [00:26:54]:

I can probably, well Unlikely. There are so many. But I've tried a lot and let me tell you, they don't work. They just don't work. They sometimes work once in a while, but most of the time they don't. And most of the time you'll be sorely disappointed. You might get that one year where you beat the S&P 500, but if you, if you significantly outperform the other nine years, is it worth it? Heck to the no. I don't have 20 years to sit around and wait for some investment strategy to finally start working.

Darren Wurz [00:27:28]:

I need the market's returns now. That's the tragic result is missing out on the generous gains of the stock market. And you can't go back in time. I want to save you from that friend. Here at the Lawyer Millionaire, we help law firm owners like you become better investors and better business leaders as well. I want to help you too. We're your one stop shop for all your business and financial planning needs. And part of that is managing your investments.

Darren Wurz [00:27:59]:

Our approach is based on the timeless proven strategies of passive long term index investing, of mark, of modern portfolio theory and efficient markets. Our approach is simple, straightforward and low cost because that is what is best. And that's only part of what we do. When you work with us, you get an entire team. You get an entire financial and business team under one roof. We're your one stop shop. We're your family office. You, you get the whole team.

Darren Wurz [00:28:37]:

You get the squad, you get a financial planner, you get an investment advisor, you get a CPA and bookkeeper, and you get a business advisor all on one team. And what's beautiful about that is no more juggling between different advisors, no more going back and forth and everybody's giving you a different answer. We're all communicating together, working on your behalf, saving you a ton of time and money. If this episode made you realize that you might be leaving money on the table, or worse, sabotaging your results when it comes to your investments. Or even worse than that, working with an advisor who is sabotaging your results. It's time for us to talk. Don't let another year slip by. This is the perfect time to book some time.

Darren Wurz [00:29:25]:

Book a call with me today and let's put the right strategies in place for you to grow your wealth and to grow your business. And if you want to connect with other law firm owners doing just that, join our Lawyer Millionaire community. The link, as always, is in the show notes. Well, that's a wrap, my friend. And remember, the ultimate form of wealth is freedom. I'm your host, Darren Wirtz. This is the lawyer millionaire. I'll see you next time.

Adedayo Adekunle
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