The Future is Bright

The Future is Bright

* This is the 2nd article in a series about the Confidence Allocation *

Last week I wrote that having conviction in a foundational set of beliefs is critical to long-term investment success.  Let’s build on that.

If you want to be a successful investor, you have to allocate your capital confidently.  Without confidence, you’re sunk.  I began my thoughts with a list of ten firmly held beliefs.  Below I’ve grouped those beliefs into three broad categories.  Each category is important, but I’ve ordered the categories by degree of importance (i.e. If you can only be confident in one of these concepts, start from the bottom of the pyramid).

Faith in Markets and Optimism

I have faith in markets and am optimistic about human progress.

  • Humankind is progressing.
  • The global economy strengthens as it evolves.
  • Financial markets do a good job at rewarding investors for providing capital and taking risk.

Knowing What You Need and What You Know

I don’t need to beat the market and the more I know, the more I know I don’t know.

  • Outperforming the collective pricing power of the market is difficult.
  • Picking good fund managers is very difficult.
  • Picking good stocks is extremely difficult.
  • Diversification is a good idea.

Beating Behavior

Markets aren’t perfect but you control what matters most.

  • People can behave irrationally.
  • Factor attribution that existed in the past, may not exist in the future.
  • There are limits to arbitrage.

 

Allocating Confidence – Foundational Beliefs

Confidence Allocation

Faith and Optimism

I’ve never met a successful pessimist.  Pessimism will get you nowhere.  This is true for life and investing.  If you’re not optimistic about the future, why would you invest?  Spend your money now because this world sucks and it’s only getting worse.  When the global economy collapses, the cash in your mattress and the gold bars you’ve been hoarding aren’t going to do you any good.

Optimists, read on.  Pessimists, I’m sorry.  I can’t help you.  You’re stuck.  Over the long-term, the economy tends to pay optimistic investors.  Pessimists lose out.  Ask John Hussman.

chart

Source: Motley Fool

What a Time to Be Alive

Why should we be optimistic?  Morgan Housel started his post What a Time to Be Alive with the following:

John D. Rockefeller was the richest man the world had ever seen.  But for most of his adult life he didn’t have electric lights, air conditioning, or sunglasses. And he never had penicillin, sunscreen, or Advil. This is not ancient history: One in twenty Americans were born before Rockefeller died.

Today, most normal Americans live better than John Rockefeller did.  Read Housel’s entire article to really put our progress in perspective.  We’ve come such a long way.  How can anybody not be optimistic about the future?  The world isn’t a perfect place, but pessimism is the path of losers (I apologize for my bluntness).

Dear Warren

Readers of this blog know I have an enormous amount of admiration for Warren Buffet.  Buffet’s unwavering optimism was the inspiration of this year’s annual letter from the Bill & Melinda Gates Foundation.  Regarding the letter, Bill Gate’s offered the following commentary on his friend Warren:

Warren Buffett is one of the best loved people in the world — and it’s easy to see why. He’s jovial and friendly. He’s funny and wise. He makes people feel good about themselves. But he has one quality that fuels all the others: Warren is the most upbeat, optimistic person we know.

He’s optimistic about the country, about the future and about you. No matter where things are right now, he knows in the long run they’re getting better. You doubt it? Don’t bet against it; he’s made billions investing in that belief. The great thing about Warren’s optimism is you can’t hear him share a story, tell a joke or say hello without picking up some of his optimism yourself.

That’s why it feels so good to be around him.

Some people might say, “I’d be optimistic, too, if I’d had his success.” But we think that has it backward. Warren’s success didn’t create his optimism; his optimism led to his success. Because optimism isn’t a belief that things will automatically get better; it’s a conviction that we can make things better.

Optimism breeds success.  The world we live in is dynamic and resilient.  We always push through adversity.  Why waste energy believing anything otherwise?

Markets that Work

With the passing of each crisis, the institutional strength of global financial markets only becomes stronger.  We learn from mistakes and evolve.  Given their complexity, financial markets will never be perfectly efficient, but over time, efficiency has certainly improved.

How far have we come?

In 1926, the man Warren Buffet credits as his mentor, Benjamin Graham was reviewing financial statements of a company called Northern Pipeline.  Information provided in the financial report was sparse, so he decided to travel to Washington where full-length records were on file with the Interstate Commerce Commission.

Graham discovered that, unbeknownst to shareholders, Northern Pipeline held $95 per share in railroad bonds and other liquid investments.  Its stock, at the time, was trading at $65 per share.  He had uncovered extraordinary hidden riches simply because he was the only one to look.

Do you think that could happen today?  Today, the nanosecond a company publicly files any type of financial report there are thousands of high-powered computers analyzing, publishing and acting on it.  Information is dispersed across the globe instantaneously.  That’s quite an improvement don’t you think?

Graham’s detective work is just one example that helps give context to our progress.  There are many.  The popular finance blog Philosophical Economics recently had the following to say about the evolution of financial markets:

Over time, markets have developed an improved understanding of the nature of long-term equity returns.  They’ve evolved increasingly efficient mechanisms and methodologies through which to manage the inherent risks in equities.

 

Not Perfect, but Good Enough

When I think about things I’m confident in, it’s hard to come up with anything better than progress.  Our markets, our economies, and our people have come such a long way in a relatively short time.  If I didn’t think this would continue, I probably wouldn’t invest at all.  The world isn’t perfect.  Financial markets aren’t perfect.  But that’s ok.  They’re good enough for me to be optimistic.

A positive outlook on the future and faith in markets are not universally accepted truths.  Unfortunately for the detractors of optimism, this lack of confidence will weigh heavily on their ability to make sound investment decisions.  For the rest of us, no matter the challenge, I’m confident that we’re going to live on.  We’re going to survive…

Further Reading…

Confidence Allocation

At Ariadne, I work closely with families and individuals to organize their finances and utilize their resources to design a life they love.  If you are interested in a straightforward, no-gimmick approach to financial planning that focuses on you and your needs, don’t hesitate to get in touch.  I’d be happy to have a conversation.

 


Tim Brennan

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