I try to maintain a fairly optimistic mindset. I consider this to be a moral obligation, given that optimism and pessimism both tend to be self-fulfilling prophecies.
Ironically one of the few things that makes me cynical is observing the cynicism of others. I’m certainly not above complaining but in the sober light of day I can acknowledge how superficial most of my complaints are. The average Canadian enjoys a standard of living that would make 19th century kings and queens envious. Even in a worst-case scenario, I will still be sheltered, food secure, and (barring some severe missteps in my personal life) loved.
Cynicism is a foundational feature of the markets. It’s actually a necessary feature of the markets: capitalism is fundamentally a system based on individuals being compensated for taking on risk. Cynicism feeds downside volatility, creating the very environment that patient investors can take advantage of to compound capital over long time horizons.
The stock market is arguably the greatest wealth-producing machine in history. Given its track record, the burden of evidence for negative long-run returns should have to be overwhelming, but headlines will tell you this is not the case. Given what I do for a living, I find that people often want to provide me with their insights on the markets. I bet 80% of predictions I hear are negative, based on some headline they saw or video they watched.
I’ve racked my brain about why people are so often bearish by default and come up with a handful of reasons.
- Loss aversion. This bias states that the pain of losing is psychologically twice as powerful as the pleasure of gaining. Human beings love high watermarks. On average, the S&P 500 has hit an all-time high on just over 1 in every 20 trading days. This means that the market is in some sort of a drawdown 95% of the time. It is common to think of any pullback from a high watermark as a “loss”, ignoring the historical returns that the market has generated.
When markets fall, they often fall quickly. When upward progress is slow, it does not resonate emotionally. Periods of loss, on the other hand, are visceral; the psychological impact of certain market pullbacks, such as the dot com bubble or the 2008 housing crash, are still felt today. When losses are pronounced and painful, their prevalence and long-term impact can wind up being overstated.
- Media focus. News broadcasts are not designed to make you feel better about the world. Headline stories typically focus on war, famine, extreme weather events, economic turmoil, corruption, or something else equally unpleasant. Positive stories aren’t really news at all. I was curious where this negativity bias came from and, like so many of our psychological quirks, it owes itself to our evolutionary trajectory. Reacting to threats used to be the basis for survival. He who was not wary of the possibility of a sabretooth tiger attack would not survive long enough to pass on his genes. As such, a “negativity bias” became a dominant trait, something that is exploited by media companies who long ago realized that bad news sells more than good news. The unfortunate by-product is that it feels like nothing good is ever happening because it’s never talked about.
- Negativity makes you sound smart. Optimism sounds like ignorance, like you’re blind to the risks that are present. This dovetails into my prior point about media focus: if the news cycle focuses only on the negative, then being “informed” is synonymous with being aware only of the negative events in the world. And what’s the point of watching a boring, cynical news broadcast if you can’t share what you’ve learned with others in order to sound smart?
- It’s easy. Doing nothing is easier than doing something, and nihilism justifies the desire to do nothing. A feeling of hopelessness removes personal responsibility from the stakes of the issue.
The issue with bearish outlooks in the capital markets is that you have to get your timing right. If you had overarching optimism and been blindly bullish for any multi-decade time period over the last 150 years or so, the market would have rewarded you handsomely. Having optimism and being bullish is a sustainable long-term strategy, both in the markets and in life. Being bearish isn’t. Over long enough time horizons, the bulls have always been proven right. And the reasons are obvious: optimists solve problems that drive progress. They are the reason that the stock market has generated so much wealth.
The progress taking place now, particularly in the developed world, is incremental. Slow change is hard to see, and all progress comes with setbacks.
I had a seminal experience on this subject a few years ago when I read the excellent book Factfulness by Hans Rosling. It is possible for two things to be true simultaneously: things are not perfect, but they’re getting better. There are very real problems in the world, but defeatist mindsets and nihilism are no solution. You owe it to yourself and the world to have optimism and a positive outlook.
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Opinions are those of the author and may not reflect those of BMO Private Investment Counsel Inc., and are not intended to provide investment, tax, accounting or legal advice. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the author nor BMO Private Investment Counsel Inc. shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance. BMO Private Investment Counsel Inc. is a wholly-owned subsidiary of Bank of Montreal.
