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Oh, The Places Your Money Will Go! (The Paradox of Passive Investing)
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AUTHOR: Jamie Seckington on 12/14/2024
FIRST: Jonathan Clements on 12/14/2024 | RECENT: Jamie Seckington on 12/25/2024
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,
WHEN I WAS A KID, my father would take me trout fishing at the many small lakes of California’s Eastern Sierra mountains. We’d usually “fish off the bottom” using a wad of floating bait attached to a weighted line. We’d then sit on a rock or in our little rowboat, and wait for a fish to come along and take the bait.
It seemed to me that some mornings we waited an awful long time.
I’VE NEVER BEEN MUCH of a collector. As a kid, I tried collecting comic books for a short time. I found that, after I read them, I had little use for them. I stored the comic books in an open box in my closet, where their translucent sleeves attracted a thick blanket of dust but little interest.
Later in life, I started a small wine collection. I didn’t get too far. It turns out I drank the wine at a rate far quicker than I acquired new vintages.
THOU SHALL NOT TIME the market. Thou shall not consider macroeconomic trends when allocating capital. Thou shall not listen to pundits on CNBC. Thou shall not engage in security analysis. Thou shall not dabble in options or individual stocks. Thou shall not shoot for the moon.
These are just some of the commandments sent down from on high to today’s index-fund investors.
As one of those investors, I assume that financial markets are more or less efficient,
Comments
Steve, you raise some good questions. Let me try to clarify my thinking behind the poem a bit… Institutions, i.e., pension funds, sovereign wealth funds, insurance companies, university endowments, mutual funds, commercial banks, etc., own 70%-80% of the U.S. stock market. When we speak of “the market,” we’re actually talking about them. Their decisions on how they choose to allocate capital are the ones that really matter. These institutions are the “active investors” that our passive index funds draft off of. The folks who invest on behalf of these institutions are highly trained specialists who are in charge of a helluva lot of money. Some might call them experts. So, as a passive index fund investor I am really putting my faith in these experts and the decisions they make in their market. If I think the experts are all a bunch of morons, then I should not be invested in an index fund that blindly follows their lead. Of course, institutions are flawed and history shows that experts make mistakes—in finance, as well as in other aspects of life. This knowledge contributes to America’s healthy skepticism toward authorities. This skepticism arguably fuels innovation and contributes to America’s dynamism as we continually poke and prod the system making adjustments. We’re currently in a moment where the distrust of experts across the board is running very high. Perhaps that distrust is justified, as people see institutions failing them in one way or another. They feel powerless, a loss of control over their lives, etc., and they blame the institutions and the experts. What sells well in such an environment? Crypto, of course! Zero day options. Meme stocks. Anything perceived as sticking it to the Man. Robinhood is a brilliant brand in this regard because it taps into this populist angst and this sense of rebellion with an easy to use interface that gives would-be rebels a sense of control over their own destiny. (I actually own some shares in my fun-money account.) Now, what I think is going to be really interesting is if it turns out the experts who invest for the institutions have unknowingly inflated another bubble. When/if they decide to reallocate funds to other assets, start selling, and the bubble pops, it’s going to be interpreted as just more evidence that experts are clueless—“Look what they did this time…” So, as far as the battle for opinion goes, I think it’s really a question of how much we trust institutions and the experts who run them. They are ultimately the ones who control the market. Our investment opinions as retail investors don’t carry much weight. However, our individual stories of how we have navigated our “money journeys,” as Jonathan has so eloquently put it, are quite valuable. These stories show what we were thinking, offer reasons why we did this or that, explain if it worked, if it did not, and what we may have done differently or what decisions we stand by. There are important lessons in the stories that help others make their own decisions as they travel their own paths. This sharing of opinion backed by personal experience also creates community and community empowers people by providing them with a sense of meaning and collective purpose. Community builds trust—a primary ingredient to civil society. My two cents…
Post: Oh, The Ironies Your Money Will Know! (The Paradox of Passive Investing)
Link to comment from December 25, 2024
Next, we have AI tell us what’s trending visually in the children’s book market. We then use an image generator to create some appealing characters and illustrate the stanzas in whatever consistent whimsical style we choose. Wa-La! HumbleDollar’s first children’s book…
Post: Oh, The Ironies Your Money Will Know! (The Paradox of Passive Investing)
Link to comment from December 16, 2024
Haha, thanks. Glad you enjoyed it. Full disclosure, I asked an AI to take the basic thesis and the examples I provided and to write a short op-ed style piece. I then made some edits and asked it to rewrite the article in the style of Dr. Seuss. ;)
Post: Oh, The Ironies Your Money Will Know! (The Paradox of Passive Investing)
Link to comment from December 15, 2024
Nice piece, Jonathan. It resonates with a book I am currently re-reading: Sebastian de Grazia’s 1962 classic, Of Time, Work and Leisure. It’s an intellectual history of these ideas and traces their trajectory from Ancient Greece to mid twentieth-century America. Good stuff.
Post: Buying Freedom
Link to comment from June 1, 2024
Thanks for unpacking a few of my generalizations and fleshing out some of the concepts touched upon in the essay. I agree with your point about discipline. Although, as someone pointed out further down in the comments, I think it is healthy to question one’s beliefs and behavior from time to time. Perhaps new information has been discovered that needs to be incorporated into my thinking, or maybe I have acquired new priorities that demand a fresh approach. We should always be asking questions. Life is dynamic and fluid and I am suspect of dogmatic attachment to a set of beliefs or practices. That said, passive investing using index funds works well for the reasons you point out above.
Post: Testing My Faith
Link to comment from April 14, 2024
I appreciate the encouragement. Thank you.
Post: Testing My Faith
Link to comment from April 14, 2024
Sounds like a great partnership! 👍
Post: Testing My Faith
Link to comment from April 14, 2024
Yeah, I hear ya; I am similarly wired. I enjoy following the ebb and flow of the markets and the discourse that surrounds them. That said, I can’t claim any special insights destined to give me any kind of sustainable investing edge. And if I had an edge, I surely would not share it with anyone and jeopardize my advantage. 😂 Echoing your final thought, the late Charlie Munger supposedly once said, “The thing about compounding is that it works best when uninterrupted.”
Post: Testing My Faith
Link to comment from April 11, 2024
Thanks for the kind words. I agree, a static allocation through one’s lifetime is not optimal. As we are more than half-way through our lifetimes, and have something of a unique situation, my wife and I have adjusted accordingly. We definitely allocate more funds to “safe” investments than most, but there is something to be said for capital preservation—and a good night’s sleep.
Post: Testing My Faith
Link to comment from April 11, 2024
All good points. The other 50 percent is tied up in our apocalypse-proof bunker compound. Just kidding. But the other 50 is in non-levered real estate and short term paper.
Post: Testing My Faith
Link to comment from April 11, 2024