Invested in My Opinion

AS THE SAYING GOES, “Never ask a barber if it’s time for a haircut.”

This isn’t to suggest that barbers lack integrity. Rather, the point is that—when faced with a question with no definitive answer—business people often offer an answer that reflects their own best interest. For a barber, it’s always a good time for a haircut. The barber is neither wrong nor correct. It’s a judgment call. But the barber is undoubtedly invested in his opinion, and he stands to gain should the questioner act on his advice.

Unlike a trustee, a barber has no fiduciary duty to his customers. He isn’t required to follow an established “standard of care” like a medical doctor treating a patient. The barber is free to give advice that serves his self-interest.

As you may have noticed, the internet is overflowing with folks eager to give advice. There’s a how-to blog, YouTube video, TikTok song and dance, and podcast on everything under the sun.

Need to change the sparkplugs on your 1994 Honda Accord? No problem, the internet has the instructions. Need to make the world’s best cup of coffee? Not a problem. There’s a subreddit devoted to the topic. Want advice on how to make your partner happy between the sheets? Need to cut your own hair? Need money advice? The internet has answers.

The web is a great resource for advice, and it’s democratized knowledge in ways that we could barely have imagined 50 years ago. It’s also a cesspool of misinformation, Ponzi schemers, and a haven for flimflammers of all stripes. It can be difficult to determine which advice is legit and which isn’t.

By “legit,” I mean advice that’s not solely a self-interested sales pitch. It’s widely known that on Wall Street everyone “talks their book.” Those who talk their book are what my academic friends call “thesis-driven.” Like our barber, they’re heavily invested in their own opinion. A thesis-driven argument cherry-picks data to support a specific, predetermined conclusion. By contrast, legit analysis examines all the data available and then formulates a conclusion based on the evidence.

We readers and contributors at HumbleDollar are also invested in our opinions. For example, I’m basically a Boglehead when it comes to investment strategy. Like many HumbleDollar readers, I’m a buy-and-hold long-term investor of globally diversified stock index funds.

So, what if someone asks me today, “Is now a good time to invest in the stock market?” What am I going to say, “no”? Is it not better for me, as a shareholder, if more investors continue to buy stocks instead of, say, gold? If there’s more demand for what I own, it’ll push share prices higher and that’s a good thing, right? Are we indexers also “talking our book”?

Yes, share prices rise as demand increases. But if you’re a truly long-term investor, such price action isn’t necessarily a good thing. As Berkshire Hathaway’s Warren Buffett once asked rhetorically, if you intend to be a net buyer of stocks for the foreseeable future, why do you want their prices to rise? He argued, “Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

When we buy stocks, we’re ultimately buying a slice of future earnings. Companies distribute a portion of these earnings to shareholders through dividends and share buybacks. They also reinvest a portion of those earnings into their businesses, with an eye to generating even greater earnings in the future. The more we pay for those earnings today, the lower our future returns will be.

In the long run, any increase in share prices ultimately reflects earnings growth. As buy-and-hold owners, we passive index fund investors expect a rate of return equal to the dividend yield at the time of our initial investment plus growth in earnings per share. That’s it. Any return greater than that sum is, as Vanguard Group founder Jack Bogle argued, the product of speculative price movements—and shouldn’t be counted on.

If this thesis is correct, there’s no need to “talk it up” in an effort to bring others into the indexing fold. The argument doesn’t need to win the popular vote, and it doesn’t require investors to “buy the story” for it to succeed.

Through index funds, I’m not investing in speculative short-term bets, where I’m wagering on where share prices may go in the near future. Rather, I’m investing in businesses that generate and increase earnings. It’s a strategy that transcends the latest investment fashions, and instead is built upon long-term earnings growth. Even our hypothetical barber would—I hope—concede that such an investment style is indeed timeless.

Jamie Seckington grew up on the beaches of Southern California listening to punk rock and raging against the machine. Decades later, he now lives a quiet life in north Idaho and reads HumbleDollar regularly. He has learned to appreciate the many ironies that life offers. Check out Jamie’s previous articles.

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