Optimism

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  By Guest Blogger Doug Rowat

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I mentioned in my last post that once investors run screaming for the hills, a significant portion just keep on running.

MIT’s 2022 study of panic selling (“When Do Investors Freak Out? Machine Learning Predictions of Panic Selling”) showed that once investors panic sell, 31% subsequently abandon risky assets. Like, FOREVER. And a significant portion of the remaining investors, return to the market so late that much of the inevitable upside has passed them by.

So, this market abandonment is, naturally, to their detriment. Long-term investing always wins, well, in the long term. Historically, this is a simple, and profitable, fact. The longer you’re invested (and resist panic selling), the better your chances of making a profit:

S&P 500 and S&P/TSX Composite: likelihood of positive and negative returns over various time periods

Source: National Bank Investments

However, what’s often overlooked is just how difficult long-term investing and planning can be. While it’s easy to simply say ‘think long term’, it’s important to acknowledge that it’s not easy. Long-term planning is essential to most endeavors, but even the best in the business acknowledge that it can be a struggle.

Magnus Carlsen, the greatest chess player of his generation, in a recent In Good Company podcast, highlighted that it’s important to his success to think long term. He considers, for example, what pawn structures he would like to have in place later in a match or perhaps what pieces would be most useful to still have on the board during the endgame. Weaker players think a maximum of two or three moves in advance, but Carlsen acknowledged in the podcast that he actually plans “quite far ahead”. The difficulty, he concedes, is that he’s faced with an opponent who’s constantly trying to ruin his planning. This, of course, is the parallel between a chess opponent and the market. You might have a long-term plan, but the market often works against it.

Business writer and behavioural investing expert Morgan Housel in his most recent book, Same As Ever, took Warren Buffett’s perhaps most famous quote and turned it on its head: “…even though Warren Buffett says to be greedy when others are fearful, far more people agree with that quote than actually act on it.” The MIT study I cite above is proof of that. We all have a long-term plan until the market craters or the economy tanks. Then the last thing we are is greedy.

And, finally, boxer Mike Tyson perhaps most succinctly highlighted the difficulty of long-term planning: “Everyone has a plan until they get punched in the face.”

I write this as we’re about to begin 2025 and I can almost guarantee that there will be moments in the coming year when markets will be so challenging that exiting them forever might seem tempting. But it should be comforting to know that long-term planning can be difficult for anyone—even those who are the best at their chosen professions. It’s helpful to know that you’re not alone.

But, when markets are difficult, what else might help you hang in? Easy. Optimism.

Optimistic people achieve better financial results. This isn’t just an opinion; much academic research supports it. Optimists believe that setbacks are temporary and that the long-term odds tilt strongly towards growth (take another long look at that chart above). Therefore, optimists stay invested. As Nick Murray, author of Simple Wealth, Inevitable Wealth states, “No one can plan for the future—much less invest successfully in it—without believing in that future.”

And the Harvard Business Review further adds:

Optimism is a lucrative investment beyond one’s finances. Optimists do better over the course of their careers as well. They make more money and are more likely to be promoted. [They are] six times more likely to be highly engaged at work, and five times less likely to burnout than pessimists.

So, are the successful individuals I highlighted above optimists? Of course they are.

Magnus Carlsen stated emphatically in the In Good Company podcast that he’s an optimist. Carlsen noted that his average overall rating in classic chess is in the 2,800 range (exceptional, even amongst grandmasters), but it increases to more than 2,900 (God-like) in matches following a loss. He attributed this increased rating to his optimism.

Morgan Housel’s also a noted optimist, frequently pointing out that bad news occurs in brief moments, getting a disproportionate amount of attention, but meanwhile the world is generally always getting better—it simply takes more time for this to become apparent. And good news definitely gets less attention. This is why, for instance, the more than 70% decline in heart disease since the 1960s doesn’t get any airtime on the nightly news, but any random overnight tragedy certainly does. And, it goes without saying, Warren Buffett himself is an optimist.

According to data scientist Michael Toth, Warren Buffett’s annual letters to shareholders from 1977 to 2016 contained more positive than negative vocabulary in 35 of 40 years.

And, finally, Mike Tyson was always optimistic that he’d win his fights and usually made his confidence quite clear: “I try to catch them right on the tip of their nose, because I try to punch the bone into the brain.” Granted, Tyson had a unique way of expressing his optimism, but you get the idea.

So, long-term planning is difficult. You’re not alone in this challenge, even the best struggle with it. But optimism always helps.

On that note, bring on 2025. LFG.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2024/12/21/optimism/