Last week I included some thoughts from Morgan Housel. I wanted to do the same thing this week as I think this excerpt from his book is valuable to think about given our current environment. It can be very easy to have a negative attitude and let pessimism run wild especially in this politically charged time. The following is an excerpt from The Psychology of Money: Timeless lessons on wealth, greed, and happiness by Morgan Housel.
“Optimism is usually defined as a belief that things will go well. But that’s incomplete. Sensible optimism is a belief that the odds are in your favor, and over time things will balance out to a good outcome even if what happens in between is filled with misery. And in fact you know it will be filled with misery. You can be optimistic that the long term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with landmines, and always will be. Those two things are not mutually exclusive.
The idea that something can gain over the long run while being a basket case in the short term is not intuitive, but that’s how a lot of things work in life. By age 20 the average person can lose roughly half the synaptic connections they had in their brain at age two, as inefficient and redundant neural pathways are cleared out. But the average 20-year-old is much smarter than the average two-year-old. Destruction in the face of progress is not only possible, but an efficient way to get rid of the excess.
Imagine if you were a parent and could see inside your child’s brain. Every morning you notice fewer synaptic connections in your kid’s head. You would panic! You would say, “This cant be right, there’s loss and destruction here. We need an intervention. We need to see a doctor!” But you don’t. What you are witnessing is the normal path of progress.
Economics, markets, and careers often follow of similar path-growth amid loss.
Heres how the U.S. economy performed over the last 170 years:
But do you know what happened during this period? Where do we begin…
- 1.3 million Americans died while fighting nine major wars.
- Roughly 99.9% of all companies that were created went out of business.
- Four U.S. presidents were assassinated.
- 675,000 Americans died in a single year from a flu pandemic.
- 30 separate natural disasters killed at least 400 Americans each.
- 33 recessions lasted a cumulative 48 years.
- The stock market fell more than 10% from a recent high at least 102 times.
- Stocks lost a third of their value at least 12 times.
- Annual inflation exceeded 7% in 20 separate years.
- The words “economic pessimism” appears in newspapers at least 29,000 times, according to Google.
Our standard of living increased 20-fold in these 170 years, but barely a day went by that lacked tangible reasons for pessimism.
A mindset that can be paranoid and optimistic at the same time is hard to maintain, because seeing things as black or white takes less effort than accepting nuance. But you need short-term paranoia to keep you alive long enough to exploit long-term optimism.”
There will always be things that go wrong in life and in markets in the short term. In the long run, people in this country will wake up and try to better themselves. Parents will always want a better future for their kids. Keep this in mind the next time someone tells you it can’t get any worse and the world is coming to an end.
As far as La Ferla Group, and our strategies for managing portfolios, we will continue to adhere to our rules-based disciplines and keep the emotions and feelings out of our decisions.
Now that the summer is over and we embark on the final days of Year 2020, we remain hopeful that America will find a way to peace and prosperity, as we have always done historically.
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