Q1 2015 was a volatile quarter that ended nearly flat. The S&P 500 did book a .4% advance, but overall in the US, markets seem to be having difficulty moving higher. We are seeing some gains outside the United States in Germany, and even Japan has been moving up. See complete coverage at http://www.bloomberg.com/markets.
Watching the markets gyrate, I can always reassure myself that portfolio values will likely be higher at some point in the future. The growth may take a long time to happen, but it seems that just like the gravity that keeps us grounded, economics has its own laws of nature that causes prices to eventually rise (that is my theory anyway, gains are never assured or guaranteed). When asset prices are going up, it seems as if we are getting our rewards for being smart investors. When markets are declining, that is when our fundamental beliefs and confidence in the process will be very important. Firm allegiance to our investment process must govern the urge to make changes when thinking long term and making no trades is the best thing to do. It is this unbending belief in the long-term investment process that gives successful investors a positive outlook. Perseverance when things go badly is our most important trait.
For investors, markets often do go in a direction that causes loss, psychological pain and anxiety. My research shows that the market direction in any given year will be negative about 1/3 of that time*. That is a big portion of time that we will need to understand that rewards of long term holding are on the way, eventually. The reward of long term investing is not tested during the 66% (or so) of the years that the market has a good year. Good times are the easy part. The rewards are earned as we stand with grit and determination when the market is falling, holding firm with the belief that quality investments prove their worth five, ten and more years from now.
Floods, hurricanes, explosions and all manner of calamities have been a fact of life since the dawn of time. The modern world is subject to these forms of natural disruptions, but our complex society presents so many more. From the Middle East to Africa, across Pakistan, Afghanistan, Ukraine and North Korea, we can see a myriad of problems, threats and challenges that can seem to portend horrific events. Not only in these regions, but for the entire world, there can be daunting fear for anyone with internet access or cable TV and the stream of information that it delivers disasters in real time, delivered 24/7.
The media has a structural tendency to take terrible events and create a narrative and theater type quality to things that possess frightening and negative dynamics. I often theorize about the need for a cable news channel that would only cover good and positive things that are happening. It would be a place to go for optimism and positive reinforcement for all of us. The “Good News Network” could be a wonderful source of escape from all of the negative energy that showers down upon us all in this hyper-connected world of 2015.
Check that, the good news source already exists, not on our wonderful (sic) cable networks but online. If you type g o o d n…google will quickly figure out that you need to go visit http://www.goodnewsnetwork.org/. I wonder why this type of media is not better known. It seems so attractive to be able to get inspiration, positive reinforcement and all the other great psychological fuel that could be absorbed by this type of material. So why is it obscure? Dot ORG? Really? Non-profit says that there is limited commercial appeal. Have you ever even heard of it?
Take a look at some of the good “News” headlines:
Wyoming Startup Builds 3-Story Vertical Farm to Employ People with Disabilities
Iowa Bill Would Give Excess Solar Energy to the Poor
January Produced Great US Jobs Report “Across the Board”
US Factories Are More Active yet Spewing Far Less Pollution
This stuff is endless and awesome. If you are ever down, it is just a click away and waiting for you like a Chocolate Sunday for your spirit.
So what is the catch? Why is our predominant media (New York Times, USA Today, Cable News etc.) saturated with scary and sad? This is a deep anthropological and biological question that is beyond my expertise as a commentator. I would speculate that we all have a desire (conscious and sub-conscious) to be alerted to threats and pitfalls that may exist in our path. It may be a big part of how our human brain has developed over the hundreds of thousands of years of man’s evolution as a species. If the caveman missed the good news of a new discovery of food or something, not a big risk, but if he and his cave family miss the news that there is a den of man eating wolves over the next hill…
It is difficult to imagine in a meaningful way how mankind must have spent many lifetimes, generations and centuries simply fighting for survival. Running from predators and finding food on a daily basis is not familiar in any way to our modern angst of not being able to decide what we want for lunch or why we cannot drive a nicer car. How we arrived in this first world lifestyle is impossible for our brains to place in the proper perspective. The experiences imbedded in our brainstem and subconscious are the product of thousands of years of human life. This caveman mind is not good at optimizing the long term investment process.
Large numbers and broad statistical data sets, especially concepts like evolution are a very difficult thing for our brains to conceptualize and relate to our real time thoughts and emotions. I recently listened to a highly entertaining and informative program available from The Teaching Company titled, Your Deceptive Mind: A Scientific Guide to Critical Thinking Skills
Yale School of Medicine
Lecture ten from the course is titled, Poor at Probability—Our Innate Innumeracy
This subject is something that is so very important to utilize in so many important areas of investing and in life. The lecture points out that
“Knowledge of mathematics and probability are critical for making
sense of the world, and while human brains excel at pattern
recognition, understanding numbers and statistics can be very
counterintuitive. The solution to our innumeracy is metacognition—understanding the
laws in our natural cognitive tendencies—and substituting formal, mathematical
analysis for our naive senses. Humans are terrible at probability.
For example, we tend to notice coincidence, when
two events seem to have a connection with each other, and we see
coincidence as highly improbable. This naive assessment ignores all the many events
that happen in our lives that do not line up. We experience, hear, see, and dream
thousands of things every day. By random chance alone, events
should appear to line up occasionally.”
I think the importance of this cannot be understated. If we live in an area with one million people, a million to one probability event could happen every day. From lottery winnings to rare diseases, long-shots will be happening. But that is not the way our mind will treat it. I have been thinking of this quite a bit since the recent tragic crash of Germanwings flight 9525.
There is nothing that can make this crash understandable on an emotional level. Those that have been harmed and their families are due our compassion, prayers and support. What I have found helps those of us on the outside mitigate our fear and put things like this in the proper perspective is to think of the vastness of the world that we live in. If we think of air travel, we know that the odds of any given plane having a problem, let alone a crash are very, very small. Take a look at http://planefinder.net/. The picture of all the planes in the sky at any one time is truly mind boggling. All the flights that are completed every day are quiet examples of the safe and successful events that are not newsworthy in any way.
When things happen that are so dark and inexplicable without any regard to human decency, I try to use the vast and expansive view of the world to comfort my mind. I remind myself that most often there are wonderful things happening and that we all need to savor each and every day for the gift that it is. And when that does not work, I go directly to read some good news headlines.
Our investment mindset needs to be prepared for adversity and challenge. We need to stay ever vigilant in preparation for bad events that continuously test our courage. The economic view I hold is that the natural trends are for more opportunity, higher standards of living and great innovation. These allow for ever greater opportunity and the wealth that is created by the great companies and institutions that serve our world.
This upward trend that runs through human history is of course filled with periods of bleak conflict and suffering. There are endless commentators and authors that will publish material that speaks of coming doom. Recently I have been led to a pundit and author named Paul Ehrlich. “The Population Bomb” was a very influential book. According to the New York Times http://www.nytimes.com/1990/12/02/magazine/betting-on-the-planet.html
The book, Published in 1968, has sold over 3 million copies. The author, Paul Ehrlich was on The Tonight Show twenty different times. The message of the book is reflected by this quote:
“The battle to feed all of humanity is over. In the 1970s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now. At this late date nothing can prevent a substantial increase in the world death rate…”
Not your typical Tonight Show programing, but the late 60’s were a different era in late night T.V. The Population Bomb is an important example of how scary plausible theories can become the accepted path of where the world is likely headed. The notion of too many people to feed as the earth’s population grows is not new. Overpopulation theories go directly to our evolutionary fear of hunger and starvation. Paul Ehrlich was a charismatic and active promoter who gained great fame and notoriety. His pessimistic theories did not prove to be accurate.
This period of the late 60’s and early 70’s is an example of tumultuous times that had massive challenge and broad demand for answers for a path forward. The New York Times noted in its lengthy 12-2-1990 piece that
“The ecologist, Paul R. Ehrlich, has been one of the world’s better-known scientists since publishing “The Population Bomb” in 1968. More than three million copies were sold, and he became perhaps the only author ever interviewed for an hour on “The Tonight Show.” When he is not teaching at Stanford University or studying butterflies in the Rockies, Ehrlich can generally be found on a plane on his way to give a lecture, collect an award or appear in an occasional spot on the “Today” show. This summer he won a five-year MacArthur Foundation grant for $345,000, and in September he went to Stockholm to share half of the $240,000 Crafoord Prize, the ecologist’s version of the Nobel. His many personal successes haven’t changed his position in the debate over humanity’s fate. He is the pessimist.
The figure of the articulate and successful prognosticator of doom is not new. Many pundits recognize that if you make audacious statements you will receive more attention and publicity that can provide a path to lucrative writing, speaking and appearance money. Selling the inside scoop of what we need to watch out for is as old as the snake oil salesmen of the past. It satisfies our urge to protect ourselves from that pack of wolves that our ancestors so crucially evaded..
There is another book that was written about Ehrlich called “The Bet”
that is an interesting story of a famous challenge to Ehrlich’s theories. The bet chronicles the other side of the pessimism that Ehrlich preached in that the economist Julian Simon challenged the notion that the world was on the cusp of running out of food and resources. Simon was a believer in the resourcefulness and ability of the human race to innovate and adapt to the challenges of the past and those that await us.
I stand firmly with Julian Simon in that the world is a gigantic place with nearly infinite resources and the rabid innovation that has led us to this point. I do not think the Ehrlich was able in any way to anticipate the types of innovation that the world has witnessed since the 1970’s. He was not a prophet and nor was it possible for anyone to be able to predict the invention and advances that have occurred and will likely continue to do so. In farming, transportation, and technology alone, there are leaps forward that have created massive surpluses globally. Sadly, much of the 2nd and 3rd world continues to struggle with scarcity and shortage that is heartbreaking and complex as to what the solutions could be.
This discussion of the frightening things that happen and those that are predicted to happen is something that I hope can help us rehearse and prepare ourselves for the inevitable challenges that lay ahead for all of us. Successful investors need to be ready to shrug off the short term clouds that appear as often as the rain disrupts the beautiful sunshine. We need great courage to succeed in the investment process and even more nerve and grit to prosper in our lives with all of the twists and turns that inevitably occur. I also hope that we can all pray together in our own way to help those who suffer in our big world.
*1/3 of years statistically being negative for stocks is a rough estimate and for discussion purposes only