Optimism as a Default Setting

At the turn of the 20th century, banker J.P. Morgan was the most powerful man on Wall Street, perhaps the most powerful man in the world. Finance in those days was still the Wild West, largely unregulated and prone to boom and bust cycles much more violent than anything we see today. On several occasions, Morgan personally orchestrated emergency measures to stop bank runs that might have otherwise taken down the financial system — typically increasing his own wealth in the process.

Shortly after one of those near misses, the Panic of 1907, an old friend of Morgan’s from Chicago came for a visit. The friend was, in the phrase of Mark Skousen, from whom I got this story, a “perma bear” — no matter what the market did, his outcome was always pessimistic. As usual, he and Morgan got to talking about the markets. And as usual, Morgan’s friend saw poor omens in every market indicator, while Morgan saw only buying opportunities. Eventually they headed out for lunch, and, walking up Broadway, Morgan’s friend was admiring the towering skyscrapers that were starting to define the Manhattan skyline. Impressed, he acknowledged they had nothing like them in Chicago. Eventually, Morgan stopped and turned to his friend. “Funny thing about these skyscrapers,” he said, “not a single one was built by a bear!”

Six years before that conversation, Morgan had completed his purchase of Andrew Carnegie’s entire steel operation for the unheard-of sum of $480 million, hundreds of billions in today’s dollars. You don’t do that deal and amass that kind of wealth with a persistently negative outlook. Count the perma bears on the Forbes 400 list or the number of pessimists who run companies in the Fortune 500. You will find none.

Winners and other men and women of foresight and ambition do monumental things; pessimists watch them from the sidelines, making a list of all the reasons things won’t work out. The losers do get to win sometimes, too. But their victories tend to be short lived, as every calamity ultimately leads to opportunity when the dust clears.
 
Bullish

In 2009, deep in the depths of the Great Financial Crisis,  Sam Zell  spoke to an audience of real estate investors and developers. He told us that “kings would be made” in that moment. He had nothing left to sell anyone, having blown out of his massive real estate holdings just three years earlier in a time of optimism. Old Sam had seen too many of these cycles; he knew that you always bet on positive outcomes, and you bet heavily when you’re alone on that side of the trade. It doesn’t always work, but it mostly does
Pessimism is intellectually seductive, and the arguments always sound smarter, especially when they dovetail with our own worries. In the early years of the recovery from that crash, Sam’s advice (which Morgan would have echoed) was hard to follow. Even four years later, in 2013, when the stock market finally made it back over the 2007 high, optimism was scarce.

There were all sorts of reasons not to trust the recovery, and if you know anything about the media, then you know they had been relaying these reasons to us morning, noon, and night, repeatedly admonishing us lest we get too optimistic. Valuations were high, they said, while earnings would surely disappoint. Interest rates would rise. Various debt crises would ensue. Demographics were unfavorable. Obama’s healthcare plan surely meant the end of America. A looming government shutdown that fall would undoubtedly be the nail in the coffin.

And yet, somehow none of those things sank us. The year 2013 turned out to be the best for stocks since the halcyon days of the late 1990s. The Dow Jones Industrial Average finished the year up 26.5%, its best finish in 18 years. The S&P 500 had its best annual return in 16 years, capping out the year with an almost 30% return, ending December at a new record. The Nasdaq soared 38.2%, led by an emerging group of biotechnology and solar stocks that put on an extraordinary show for a new generation of growth stock enthusiasts.

A new car company came out of the woodwork, too, and its relatively unknown CEO, Elon Musk, appeared on the cover of Fortune magazine as “Businessperson of the Year” in December. Tesla’s stock was up over 350% in 2013, kicking down the door to a new era while clearing the cobwebs of the aughts decade crisis away. Tesla’s rise and Musk’s wholly unorthodox approach to building his business represented the start of something entirely different from what we were accustomed to. This brought out as many haters and doubters as it did fans and acolytes. What was clear to both sides, however, was that something was changing.

For every negative you could have cited about the environment of 2013, there were plenty of reasons for optimism, as stocks reached new heights and smashed through a wall of skepticism. You just had to work a little harder to find them. This was true then, and it is true now. It will always be true.

Why do I feel like history is once again repeating itself? Because there will ALWAYS be a reason not to invest. Every single week it seems there is a new problem emerging and another catastrophe DuJour – this is the constant in our life.
What else is constant? That despite the problems we have seen in years past – markets continue to go higher, we evolve as humans and life expectancy continues to climb higher as technology advances.

Bear Hunting
Today we are once again contending with all sorts of threats to our future well-being. Earnings expectations, we are told, must ultimately revert lower once companies run out of price hikes they can put forth, while the cost of employing people and running a business will surely increase. Profits are too high and must come down. Higher interest rates have put the real estate market on freeze and how would we not mention the recent U.S. Presidential election.

Talk to the average person on the street, and there’s almost nothing good worth saying. The polls are nearly unanimously negative.
“It’s bad and likely to get worse.”
What is bad? What is likely to get worse?
“I don’t know. It. Everything.”
OK, nice talking to you.

My point is that it’s easy to make lists of problems. Of everything that could go wrong or get worse. I could do it with my eyes closed, and so could you.

But the optimists are eventually proven right. Not every day, but always and eventually. Indisputably. It just takes a while to be able to see it play out. Even if you don’t believe me, make your investment in the future anyway, just in case I end up being right . Plant your seed regardless. If you end up being right in your pessimism many years from now, we will all have bigger problems than what our investments are worth. Being optimistic all the time is difficult. But having any other disposition as a default setting makes little sense when you’re investing for a future far out in front of us.

Of the many ways we can choose to live, I choose to live with optimism as my default setting.