“The American stock market is similar to watching a person walk up the stairs with a yo yo. People focus on the yo yo going up and down, while the real story is the consistent movement of the person up the stairs.”
– Tom Lewis
One of the most important mindsets which is absolutely critical for anyone who wants to become a great investor…Optimism
To become a great investor, one must maintain a fundamental faith in the future, and that things will continue to get better in the world over time. In the words of Tom Lewis, we must always focus our attention on the world’s slow, consistent and inevitable climb up the stairs of progress.
Because our investment discipline is tactical in nature, and sometimes calls for us to rotate our portfolio allocations away from risk assets, it can at times cause us to lose sight of this important fact. Of course, our active management is an attempt to soften the impact of some of the intermediate term downdrafts of the “market yo-yo”, but this strategic management should not cause us to lose sight of the fundamental reality that, in the long run, things will get better for mankind, and that asset prices will reflect this progress.
Of course, we are aware that there is no shortage of reasons to feel afraid and pessimistic about the world today. Simply open a newspaper or turn on the television, and you will be bombarded with bad news, and a scary outlook for the future. We can only wonder which dark calamity will cause the demise of the world as we know it, and the destruction of our quality of life. Will it be global warming that makes our planet uninhabitable? Will it be the runaway spending of Washington DC politicians which will cause an economic meltdown? Will it be the rise of violent civic unrest driven by economic inequality that plunges the world into anarchy?
Pessimism is indeed in a Bull Market in the world today.
This month, we thought it might be useful to take a look on the “Bright Side”, and to make the case for Optimism. In so doing, we will summarize the outstanding new book by Matt Ridley, called The Rational Optimist, which makes a wonderful case for a great future.
Throughout history, it has been fashionable, “Smart” and intellectual to be pessimistic, while optimists are generally considered naïve and childish. Ridley’s book chronicles centuries of famous “intellectuals” who were considered the great thinkers of their time because of their convincing dire predictions for how the world was headed for imminent disaster. Moreover, Pessimists possess a unique skill known as “turning point-itis” which enables them to ignore and explain away the facts of human success. Every generation of pessimists proposes that, despite a long history of progress, we are now at a “turning point” in human history, and that the future will be different than the past. In the words of Matt Ridley:
“defining moments, tipping points, thresholds and points of no return have been encountered, it seems, by pessimists in every generation. A fresh crop of pessimists springs up each decade, unabashed in its certainty that it stands balanced upon the fulcrum of history. They wail that society has reached a turning point – we have seen our best days.”
“Turning Point – itis” is a necessary weapon in the arsenal of the pessimist, because his views are in direct contradiction with the facts. Consistent and relentless improvement in quality of life has been a central fact of human existence for the last 100,000 years, a fact which is difficult for the “Intellectual Pessimist” to explain away. Because pessimism has been so foolishly wrong, its practitioners must use “Turning Points” as an explanation for why NOW is the time that things are going to suddenly change from constant improvement to sudden deterioration. Consider the dire predictions in just the last 50 years – the life span of many reading this article – which have been proven laughably wrong:
- During the Cold war, it seemed only a matter of time until the nuclear arms race would lead the world to mutually assured destruction. No such disaster occurred, and in fact nuclear arms have been since drastically reduced.
- Starting in the 1950’s many leaders in the field of medicine predicted that the rise of the use of chemicals would lead to an uncontrollable epidemic in cancer, and one intellectual predicted that the US life expectancy would drop to forty two years by 1980. Instead, the incidence of cancer and the death rate from cancer have both dropped dramatically, and life expectancies have relentlessly risen.
- It has long been fashionable to predict that the world would run out of food and that humanity would experience mass starvation. Ever since Robert Malthus predicted in 1798 that the food supply could not keep up with population growth, people have been predicting mass starvation due to finite food production capabilities. The world now has several billion people more, and the world has never in history had a more abundant food supply.
- Likewise it has been fashionable through the years to predict that we are at a “peak” in other natural resources which are on the very verge of running out. From oil, to natural gas, forests, zinc, copper, tin or stone, fashionable pessimists have predicted that they all are on the brink of running out. Instead, new technologies for mining and extraction are making these resources more abundant than ever before.
- All pessimists love a good plague or pandemic. From AIDS to SAARS to the Swine Flu, the Bird flu, and Ebola, it seems as if there is a new global health threat every year that threatens to wipe us all out. This prediction is so popular that Hollywood constantly makes blockbuster movies about it. While many of these diseases and illnesses are terrible, none have had the impact they were feared to bring.
- Pessimists have even managed to bring predictions of doom to the technology world. Today we can look back with laughter at all of those who stockpiled food, water, and currency in the days leading up to the Y2K computer conversion in 1999.
It is amazing that human beings are wired to believe that it is “Smart” to be pessimistic, and that we are at every moment on the brink of some great calamity, when the record of history is that things have consistently gotten better for mankind, and that the most dire predictions of gloom set forth by the great thinkers of every age have generally been wrong.
Missing the Point!
Pessimists are usually right about the logic behind their predictions, which typically revolves around the premise that, if the world continues as it is now, we are headed for great disaster. What they fail to notice is that the world NEVER stays as it is, because of human innovation. The critical mistake of pessimists throughout history is that they ignore the impact of human invention and innovation.
“The pessimists are right when they say that, if the world continues as it is, it will end in disaster for all humanity. If transport depends upon oil, and oil runs out, transport will cease. If agriculture continues to depend on irrigation and aquifers are depleted, then starvation will ensue. But notice the conditional: if. The world will not continue as it is. That is the whole point of human progress, the whole message of cultural evolution, the whole import of dynamic change. The human race has become a collective problem solving machine and it solves problems by changing its ways. It does so through invention driven often by the market: scarcity drives up prices, that encourages the development of alternatives and efficiencies. It has happened often in history. When whales grew scarce, petroleum was used instead as a source of oil. The pessimists mistake is extrapolationism: assuming that the future is just a bigger version of the past.
Extrapolations are dead right, but so was the man who (probably apocryphally) predicted ten feet of horse manure in the streets of London by 1950.”
Of course, it was right to make a dark prediction that the streets of London would be buried under 10 feet of horse manure, if horses remained the primary means of transportation in London. The problem is that it was wrong to miss the invention of the car.
The Happy Reality
Despite the popularity of Pessimism, the wonderful truth is that human quality of life has gotten better, more or less consistently, for the last 100,000 years. The even more exciting reality is that the pace of improvement in living conditions is clearly picking up, and that things have been getting better at an exponential rate in the last 50 years. Ridley outlines this reality eloquently:
“Roughly eight out of ten American households had running water, central heating, electric light, washing machines and refrigerators by 1955. Almost none had these luxuries in 1900. Yet looking back now, another 50 years later, the middle class of 1955, luxuriating in their cars, comforts and gadgets, would today be described as “below the poverty line”…Today, of Americans officially designated as “poor”, 99% have electricity, running water, flush toilets, and a refrigerator; 95% have a television, 88% a telephone, 71% a car and 70% air conditioning. Cornelius Vanderbilt had none of these. Even in 1970 only 36% of all Americans had air conditioning: in 2005 79% of poor households did.
Compared with 1955, the average human being on Planet Earth in 2005 earned nearly three times as much money (corrected for inflation), ate one-third more calories of food, buried one third as many of her children, and could expect to live one third longer. She was less likely to die as a result of war, murder, childbirth, accidents, tornadoes, flooding, famine, whooping cough, tuburcleosis, malaria, diphtheria, typhus, typhoid, measles, smallpox, scurvy or polio. She was less likely to get cancer, heart disease or stroke. She was more likely to be literate and to have finished school. She was more likely to own a telephone, a flush toilet, a refrigerator. All this during a half-century when the world population has more than doubled, so that far from being rationed by population pressure, the goods and services available to the people of the world have expanded. It is, by any standard, an astonishing human achievement.”
Indeed, the record of history is clear. Things just keep getting relentlessly better for human quality of life, and the last 100 years have experienced an explosion in improvement. Why should we expect that trend to stop?
A Wildly Better Future
There is good reason to believe that this process of constant improvement in living conditions is picking up, not slowing down. Certainly, the pace has been accelerating at a significantly higher rate in the last 200 years, and a blinding pace in the last 50 years. If it is true that human ingenuity and communication is the key element which spurs innovation, then the lifeblood of this collective intelligence is the ease with which human beings can communicate.
Throughout history, the ease of communication has increased the pace and quantity of new idea creation and innovation. Consider the burst in economic activity which occurred after Gutenberg invented the printing press. Then consider the massive potential for improvement which lies within the communication network of today’s internet! There has been an explosion in communication and interconnectedness, and a corresponding explosion in the opportunities for ideas and innovations. The only logical outcome is that we should expect is for a continued explosion in innovation and invention that will positively impact our quality of life in the next 100 years, as the great communication possibilities of the internet enable millions of idea collaborations which lead to millions of enhancements and innovations.
If you want be a successful investor, be optimistic! Warren Buffet is perhaps the world’s greatest investor. A central aspect of Mr. Buffett’s investment strategy: his long-term optimism. He is now worth over $60 billion. Not bad for an eternal optimist.