Saturday, June 18, 2016

Triumph of the Optimists

When interviewing people, the venture capitalist and entrepreneur Peter Thiel has a go-to question: "Tell me something that's true that nobody else agrees with." As it turns out, this is a stunningly hard question. But one of my answers would be simply, "That the world is getting much better."

We are bombarded daily with news coverage of threats like terrorism, global pandemic and economic mayhem. It's hard to follow the news without getting depressed about the future of humanity and the planet we inhabit. And yet, the truth is, the world is getting much better. This is true broadly in human health, economic well-being and safety, as documented by writers like Matt Ridley, Charles Kenny and Steven Pinker. On Twitter, I'm constantly impressed by the data visualizations compiled by Max Roser and, which highlight remarkable improvements in our world. This is not to deny that major suffering still exists, or that pockets of society in the US have seen only modest progress over the last 50 years. But looking at the big picture, I find it hard not to be awed by the strides we have made over several generations, and to therefore be optimistic about future developments.

Still, this appears to be a relatively unusual opinion. Even if it is something people agree with on an intellectual level, they often cannot help but feel differently at the visceral level. Why exactly this is the case is the cause of much debate. Personally, I'm always interested in trying to figure out how to apply contrarian opinions for practical purposes. It struck me that I use this particular unpopular stance all the time: I invest in equities for the long term. 

Contrarian optimism is hardly an unusual strategy when it comes to investing.  There are two quotes that every investing aficionado knows: (1) "Be fearful when others are greedy, and be greedy when others are fearful" (Warren Buffett), and (2) "The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell." (John Templeton). But I'm thinking here of a longer term phenomenon instead of a cyclical one. Equity investors are generally rewarded for tolerating short-term volatility and long-term uncertainty. In fact, this is one of the many findings of Dimson, Marsh and Staunton's book that produced the title of this post. I wrote a few months ago that the point of a bear market is to return risky assets to their rightful owners. Most people seem ill-equipped for a combination of volatility and uncertainty, but this prevents them from enjoying the benefits of compounding, which only accumulate over time. Looking back at long periods of history is helpful for grasping the gigantic advantage available to those who can truly invest for the long term.

Obviously, it's possible to take this optimism too far. Investors often overestimate a company's long-term prospects. And the great bubbles in history have been the unfortunate byproduct of excessive optimism, greed and a pernicious fear of missing out. There's no doubt that we all need a healthy dose of skepticism to counter the inherent bullishness of the Wall Street machine. So an optimistic outlook needs to be combined with a finely-tuned malarkey detector. But while the pessimists sit on their hands, predicting the next financial collapse or outbreak of hyperinflation, positive change continues to happen all around us. As Ben Carlson notes, "Investors now spend 90% of their time planning for events that happen 5% of the time." This hardly seems like the best way to plan for the future. Instead, the best financial strategies focus on the powerful improvements unfolding over the long term while acknowledging the short-term challenges that always exist.

Of course, only time will tell if I'm right. But I'm relatively confident in betting that the next 50 years will prove to be yet another triumph of the optimists. 


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