In today's episode Nicholas Olesen, CFP®, CPWA®shares how seductive pessimism can be and why it's so hard but advantageous to be an optimistic investor.
With what feels like a world getting closer and closer to WWIII, it’s understandable that, from an investing perspective, you can start to feel concerned. However, as Nicholas shares, allowing history to be your gauge, not market pundits selling fear, can help you stay the course.
You can find a transcript of today’s show below.
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Transcript from today’s show:
As I see images and headlines coming from Ukraine, I can’t help but feel upset and saddened. It’s disconcerting and upsetting to put myself in their shoes and image how they are feeling. As a father of three young inquisitive kids, this weekend we had some deep conversations about power and oppression and war.
After reflecting on this over the weekend, it struck me that this instance is incredible difficult and serious and we should not take it lightly on what impact this will have on Ukraine and Russian citizens, all of Europe, and diplomacy across the globe. However, it’s often the case that investors make mountains out of molehills. There are much less serious or probable outcomes that cause investors to step away from the markets or go to cash or make investment changes.
One of my favorite authors, Morgan Housel, wrote “Pessimism is intellectually seductive in a way optimism only wishes it could be.” I couldn’t agree more.
Most of the pessimistic pundits and market commenters are highly intelligent and can make their case with charts and data that sound compelling.
Your attention is one of the most valuable assets and every media company know this. They know that if you saw two headlines next to each other, you will most likely click on the one that sounds more outrageous. Here’s two headlines, which would you click on?
- The stock market will probably grow around 8% this year
- The Next Great Depression is around the corner
On TV, repeat guests tend to be people who have strong opinions on a topic like gold, and who are delighted to have a spirited argument with anyone who disagrees. Producers know these debates attract attention, so they continue to invite highly opinionated analysts to share their views.
Ray Dalio, billionaire hedge-fund manager, the founder of Bridgewater Associates, has made strong predictions and warned of financial crisis after financial crisis and in March of 2015 wrote about “the end of the super cycle”.
Dr. Doom – Noriel Roubini – NYU economist wrote in 2015 that there is a “liquidity time bomb” that will “trigger a bust and a collapse”.
Just as a gauge of return, the Vanguard Total Stock Market ETF is up 132% during that time.
Michael Burry, who predicted the stock market crash in 2008 and made billions betting against subprime mortgages and the subject that the movie The Big Short was based on, couldn’t stop trying to predict the next big crash. He has made very bold claims about a financial crisis and crash coming, most notably in 2017, suggesting a collapse similar to 2008. Since then, the market is up 100%.
Harry Dent, James Rickards, and other similar authors write compelling and strongly titled books that usually have a cover image of money on fire. Unfortunately, their books sell a lot and they are given airtime from the press.
All these predictions and pundits lean into something that’s been talked about forever. Take this quote from Seneca, the Roman philosopher: “Our fears are always more numerous than our dangers.”
Don’t allow yourself to get sucked into this line of thinking.
Invest like an optimist. That does not mean take all the risk you can and swing for the fences all the time or to not perform due diligence or have appropriate portfolio design.
So, being an optimistic investor means you need to look at things and envision how it could realistically work out. How probable of an outcome is success? Believe in capitalism and that owning businesses will work.
Here’s a fun stat: “The Historical odds of making money in the U.S. Markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20-year periods. Anything that keeps you in the game has a quantifiable advantage.”
Being too optimistic and only believing in what the upside is can also be a painful ride. One of the recent examples is the “innovation” portfolios that ARKK invest manages. They had an incredible run during 2020, when everyone seemed to think the whole world would work from home forever and the latest technologies would grow 10x per year. But then reality sunk in, and realistic forecasts started to come in. After stellar performance in 2020, the main fund is down 60% since the start of 2021.
If you are nervous or start getting sucked into the seduction of pessimism, then allow that to help you save more. But don’t allow it to make you fearful of investing.
With what feels like a world getting closer and closer to WWIII, it’s understandable that from an investing perspective you can start to feel concerned. However, allow history to be your gauge, not market pundits selling fear. Recent geopolitical events show that maybe investors are heartless but here’s a few recent examples:
- During WWII the market bottomed in 1942, three years before the war was over, and rallied over 100% before the end of the war in 1945
- During the Cuban missile crisis, which lasted 13 days in October of 1962, the Dow only lost 1.2%, then went onto finish the year up 10%
- A year after Iraq invaded Kuwait the S&P 500 was up 10%
- A year after the start of the Gulf war in 1991, the S&P 500 was up 32%
- The U.S. invaded Iraq in March 2003. Stocks rose 2.3% the following day and finished up the year with a gain of more than 30% from that point on
The point here is the market’s reaction to war and geopolitical crises can be counterintuitive. Similar to many other headline types of reactions we see in the markets. It’s always difficult to know how investors will react to certain events because so much of the market’s reaction to these events is context dependent.
But we can choose to be optimistic in how we allocate capital and pessimistic in how we save our earnings.