Let me tell you about the time when my brain was poisoned. It was October 2012 and I was at my first financial conference.
I’m early in my career and had little reason to be optimistic. My experiences until that point had been nothing but negative.
I spent my time during the GFC as a waiter at an upscale restaurant. Business was dead. The last 6 months of my tenure were spent playing arcade games while patrons mostly stayed home. I entered the real world with a crappy resume and the lousiest economy in 40 years. I spent 2 years cold calling people who didn’t know me to sell products they didn’t want. I spent the next two years unemployed and figuring out what I was going to do with my life. I got more rejections than I can remember. Over the years, even living at home, I drained the bank account that I had built up during my earlier working years.
So when I walked into that conference room, I was ready, willing, and able to be convinced that bad times were here to stay.
The economic recovery was the weakest one we’ve ever experienced coming off such a severe contraction. The stock market, however, more than doubled from the lows. So it sure seemed reasonable to ask, and even suggest, that the market had gotten ahead of itself.
And that’s just what happened.* One of the chief strategists on the stage was talking about the dark ages or some shit. I can’t remember the exact details. But one thing he said did stick with me. “My job is to worry about the downside. The upside will take care of itself.” I thought that was the most profound thing I ever heard. Looking back, I had it all wrong.
I don’t blame this person. That literally is his job. That’s what he gets paid to do. But for most investors, if you worry too much about the downside, the upside won’t take care of itself. If you’re constantly focusing on what can go wrong, what do you think your portfolio is going to look like? I’ve seen these over the years and let me tell you, the upside didn’t take care of itself.
Worrying is normal. Life is full of disappointments so we tend to protect ourselves from emotional harm. Expect the worst and bathe in the dopamine when it doesn’t come to pass.
Investors have to constantly fight to stay positive. Actually, let me rephrase that. You don’t have to be positive or negative, you can be both. You can worry about the short term and be optimistic about the long term. That’s how I tend to behave. When I say you have to constantly fight, what I’m talking about is the never-ending negativity. You can’t give in!
In Bill Miller’s most recent investor letter, he perfectly captures the posture that most investors ought to have.
When I am asked what I worry about in the market, the answer usually is “nothing”, because everyone else in the market seems to spend an inordinate amount of time worrying, and so all of the relevant worries seem to be covered. My worries won’t have any impact except to detract from something much more useful, which is trying to make good long-term investment decisions.
Read that again. It’s perfect.
As I walked into that conference room in October 2012, the market fell to a 7-week low. Why?
“Our trading partners have bigger economic issues than even we have, and that’s why we saw September drop off significantly for companies” said Tim Ghriskey, chief investment officer at Solaris Asset Management. “There’s continuing uncertainty about the economic health of Europe and China.”
Whether it’s Europe or China or something else, there are always reasons to sell. It’s been a while, but given that we’re at all-time highs, I thought now was a good time to update this chart.
Try and fill in that chart with positive headlines. You can’t. Because there are no positive headlines. Bill Gates said it best: “Headlines, in a way, are what mislead you, because bad news is a headline, and gradual improvement is not.”
Is there outcome bias here? Sure. Would I feel differently about that “upside will take care of itself” quote if the market hadn’t done what it did since then? Probably. But be that as it may, Bill Miller absolutely hit the nail on the head. Given our propensity to worry about everything, just assume the market is always pricing that in better than you can.
Ben and I spoke about Bill Miller’s letter on this week’s Animal Spirits
*True story. Jim O’Shaughnessy was the only optimist in the room. Love you, Jim.