One of the most basic rules of sound investing is also one of the most frequently violated: Never invest in something you do not understand. Many of the worst investment mistakes I have seen were made by successful, highly educated people.
Whether it was getting sucked into investment pumped on TikTok or buying real estate sight unseen, which didn’t even exist, investors blindly let their emotions win out over common sense and a willingness to operate in the dark.
This week on Shabbat, we read Parshat Bo, which describes the final stages of the Exodus from Egypt. It offers a powerful blueprint for understanding why clarity, comprehension, and active engagement are prerequisites for freedom. Among the plagues described in Parshat Bo is the plague of darkness.
The Torah emphasizes not just its intensity, but its effect: “They did not see one another, and no one could rise from his place for three days” (Exodus 10:23).
Rashi explains that this was not ordinary darkness, but rather “a darkness of gloom, so that a person could not see his fellow.”
Darkness here represents more than the absence of light. It is disorientation, an inability to perceive reality or respond effectively.
In investing, a lack of understanding creates the same paralysis. When markets decline, investors who never truly understood what they owned are the first to panic. They sell at the wrong time or freeze entirely.
In his book Beyond Greed and Fear, Hersh Shifrin discusses how investors are far more likely to abandon investments during periods of stress when they do not understand the underlying risks or expected volatility.
Contrast the Egyptians’ paralysis in the plague of darkness with the instructions to Bnei Yisrael regarding the Passover sacrifice. They are commanded to select the lamb days in advance, examine it carefully, and guard it. Rashi says the lamb shall be kept under watch to ensure it has no blemish.
This is deliberate, thoughtful preparation. Redemption does not happen through slogans or blind faith. It requires engagement, responsibility, and understanding.
Financial due diligence
In financial terms, this is due diligence. Investors must understand what they own, why they own it, and how it behaves under different conditions. Buying something simply because it was recommended – in an email blast, by a colleague at the water cooler, or even by a professional – is not a strategy.
The Ramban (Nachmanides) says the goal of all these miracles was to teach awareness: to train people to see cause and effect and reject the idea that events are random.
This idea directly challenges a common investor mistake: focusing on outcomes without understanding the process. If an investment made money, but you don’t understand why, that is not success; it is luck. And luck is not a repeatable strategy.
Behavioral finance research consistently demonstrates that investors who chase performance or invest in products they do not understand significantly underperform the markets.
As I quoted previously, a landmark study by Barber and Odean found that individual investors who trade frequently – often driven by overconfidence and limited understanding – underperformed the market by about 6.5% per year.
Similarly, DALBAR’s Quantitative Analysis of Investor Behavior has shown for decades that the average equity investor underperforms the S&P 500 by a wide margin, largely due to poor timing decisions driven by fear and confusion.
In its 2023 report, DALBAR found that over a 20-year period, the average equity investor had earned roughly half the return of the broader market, primarily because investors buy high, sell low, and abandon strategies they never fully understood.
Complexity plays a major role. Financial products that are difficult to explain are often difficult to hold, especially when volatility strikes.
Warren Buffett famously said he does not invest in businesses he cannot understand. This is not humility; it is discipline. Complexity is often marketed as sophistication, but in reality, it frequently serves to obscure risk.
If a belief, value, or investment cannot be explained clearly, it is unlikely to endure. A sound financial plan should be understandable – not only to the investor, but also to a spouse or child.
The Exodus marks the transition from slavery to freedom, and freedom demands responsibility. Slaves do not need to understand systems. Free people do.
Financial independence is not achieved by chasing trends or outsourcing thinking. It is built through disciplined decision-making, patience, and understanding.
Before investing, every investor should be able to answer four questions: How does this investment make money? What risks am I taking? How does it behave in bad markets? Why does it belong in my portfolio?
If the answer to any of these is unclear, walk away. Freedom is based on making educated, thoughtful decisions, not blindly following and hoping things will turn out well.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates. aaron@lighthousecapital.co.il Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.