Friday, September 13, 2013

why be an optimist?

The 2002 book Bringing Down the House told the true story of how six MIT math geniuses mastered blackjack card counting and took Las Vegas for millions. It had money, sex, drugs, and power. People loved it.

But part of the story often went misunderstood. The card-counters didn't win every hand of blackjack, or anything close to it. The casino normally has a slight edge over players. The MIT crew's strategy tipped those odds just barely in their favor. That meant they still lost a lot of bets. "Even the most complex systems seemed to aim at an overall edge of around 2 percent," author Ben Mezrich wrote.

But that tiny edge was all the crew needed to succeed, provided they played long enough. When the odds are even slightly in your favor, you will win over timeeven if you lose often in between.

That's why I'm an optimist on the economy and the market. Maybe even a permanent optimist.

Take a look at this chart, showing GDP per capita adjusted for inflation since 1850:


Do you know what happened during this period?
  • 1.3 million Americans died while fighting nine major wars.
  • 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 97 times.
  • Stocks lost a third of their value at least 12 times.
  • Annual inflation exceeded 7% in 20 separate years.
  • The words "economic pessimism" appeared in newspapers at least 29,000 times, according to Google.
And yet our standard of living increased 20-fold.

Being an optimist doesn't mean I don't think bad things will happen. They will. Like the MIT players, I'm going to lose a lot of hands. But also like them, I'm confident that the long-term odds are in my favor.

"Count the perma bears on the Forbes 400 list or the amount of pessimists who run companies in the Fortune 500," Josh Brown writes, "You will find none."

***

Warren Buffett had this wonderful take in the midst of the 2008 crash when everyone around him was losing their minds and preparing for the end of capitalism as we know it:

During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

Buffett was busy buying stocks as he wrote those words in the depths of the crisis and sowing the seeds for huge future gains. What were you doing?

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