Optimism – Another Key To Investment Success

Investment success is largely a matter of temperament. Warren Buffett has often stated that emotional control is more important than intellect when investing. A key aspect of emotional control is an ability to see the positive or be optimistic about the investment potential, particularly when markets have declined sharply.

Markets are cyclical, and while there will always be downturns, there will also be upturns. As Howard Marks put it in his book The Most Important Thing: Uncommon Sense for the Thoughtful Investor:

Every once in a while, an up-or-down-leg goes on for a long time and/or to a great extreme and people start to say “this time it’s different.” They cite the changes in geopolitics, institutions, technology or behaviour that have rendered the “old rules” obsolete. They make investment decisions that extrapolate the recent trend. And then it turns out that the old rules still apply and the cycle resumes. In the end, trees don’t grow to the sky, and few things go to zero.

In fact, the long-term trend is that things are getting better. As the world advances in technology, transportation, medical services and communication we continue to see increased GDP per capita. The USA is a good example. Warren Buffet calls the babies being born in America today “the luckiest crop in history”.

Many politicians and economists have bemoaned 2% growth in the US Economy as too low. If we believe the politicians, then few of us would invest our hard earned money into the US and other developed economies. Warren Buffett has a different perspective:

America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians need not shed tears for tomorrow’s children.

Warren Buffett

Optimism creates investment success

Ongoing economic growth and improving living standards are reasons for optimism.

This economic progress enables us to remain confident about investment success during market downturns because markets will keep growing in the long term. Ultimately, down cycles must reverse. These downturns are an opportunity to invest in more shares at bargain prices.

Remaining optimistic requires that we ignore daily market moves, politics or tales about companies or the people within them. We take the view that over the long term the markets will rise and as long as we invest in businesses that have an opportunity to increase earnings, our investments will help us achieve our goal of growing wealth.

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