By: Ryan Dolan
“I am an optimist. It does not seem too much use being anything else.”
Winston Churchill
“In the long run, successful investing is essentially a battle that takes place in the investor’s unconscious mind - a battle between faith in the future and fear of the future…the investor’s lifetime return will be to a very great extent governed by which of these impulses wins.”
Nick Murray
I had a frank and honest phone call with a client the other day.
We go way back, having worked together in a past life. He’s thoughtful and intelligent, with considerable investing savvy and experience. He enjoys the intellectual challenge of investing, and has spent much of the last 15 years managing money-first professionally and then on his own.
Candidly, I think what initially bonded us was our shared cynical and pessimistic view of the world and human nature (though we would have called it “realistic”). We were suspicious of Wall Street, politicians, central bankers, the media. Classic X-ers. To be fair, we had seen plenty working on Wall Street over the years to warrant a pretty dark view of humanity and markets.
Following the financial crisis of 2008 we went separate career directions. He went to a money manager, I started my financial advisory firm. It was then that our worldviews started to diverge. I think my buddy would be the first to admit that his pessimistic nature became more ingrained as time passed. The investing implications had been considerable. As an investor, while he’s had some episodic big winners, his innate bearishness had led to years of relentlessly poor investment returns in a never-ending bull market. Augmenting the financial toll was the psychological and personal one. He was wearing himself and those around him down fighting a negative crusade. I understood, I’d been there-but I’d seen the light.
When you start your own firm, there’s nowhere to hide. Unlike working at a big company-you get an unvarnished picture of your strengths and weaknesses. You can’t blame shift. Good or bad, it’s all on you. It became clear that one of my glaring weaknesses was my pessimistic worldview. I was risk averse, had a scarcity mindset, and saw much to fear about the future. Without question it was blunting the potential of my investing, my business, and my life. I looked at the people I liked, respected and wanted to emulate-all of them optimists. They were unquestionably more resilient, productive, and happy. When life knocked them down-they recovered quickly and went on to new heights. The pessimists, on the other hand, were downbeat, risk-averse, always seeing catastrophe around the corner. They were - and I was - often a bummer to be around.
I’ve come to believe there is deep wisdom in optimism. The older I get and the more experience I accumulate, the more true that is. I now know that it is essential to hardwire faith in the future into your personal and financial mindset. It’s important to define what I’m talking about and what I am not. I’m not talking about flimsy, weak-kneed, and untested optimism. This mindset is almost worse than pessimism, as it buckles immediately when making contact with any unexpected adversity. I’m also not talking about a belief, common today (particularly in the tech industry), that humanity is on a permanent glide-path of continuous improvement and “optimization.” Read history. Human progress has never been a straight line.
No. I’m talking about a deep faith, an ironclad conviction that, though the road will be bumpy, progress and growth are inevitable. It’s a belief that personally we are capable of far more than we can conceive, and personal growth-in all areas-is a lifelong pursuit that never ends. It’s the conviction that human society, over the long arc of time, gets better. It’s a belief that thought markets can do anything in the short and medium term, there is only one long term outcome: higher.
Back to my buddy.
A core priority in my work with him has been trying to get him to understand this logic of long-term personal and financial optimism. We’ve made considerable progress recently, particularly when he relinquished investment discretion on a big chunk of his money to be managed by my firm. That was a big step. We agreed that he would still manage a much more modest sized account-to keep his hand in the game-albeit with lower stakes. I can see his trading activity in that account. After months of limited activity, it erupted in a rash of hair-trigger, ultra bearish bets recently.
I immediately got him on the phone, and gently-but firmly-called him out. I asked what prompted this pessimistic “relapse.” He gave me all the reasons I expected: stock market overvaluation, rising rates and inflation, tightening monetary policy, recent volatility, etc, etc. While I understood his arguments, and considered many of them valid, I asked how this type of trading had worked out in the past? I asked how likely it was that he would be able to successfully dance in and out of markets? I asked how he was going to achieve his long-term financial goals without better investment returns? I reiterated that I already had him very conservatively postured, and that the best thing that could happen for him long-term would be a big bear market where we could put a lot of money to work. It was tough love, but it was necessary. Ultimately, I talked him off the ledge.
Mindset is everything. In a time of pervasive fear and anxiety, ask yourself the question, and be ruthlessly honest: faith or fear? Which is your default setting? If it’s fear, you are selling your financial life-and everything else for that matter-short.