Letter # 38

In late 2008, the Dow Jones Industrial Average was down close to 40% from its recent high as the global financial crisis engulfed the entire world. A crisis of this magnitude was unprecedented, and everyone was uncertain as to what would happen next. That’s when an article appeared, ⁽¹ ‘As if things weren’t bad enough…’

“Around the end of June 2010, the US will break into six pieces. California will form the nucleus of ‘The Californian Republic’ and will be part of China. Texas will be the heart of ‘The Texas Republic’, a cluster of states that will go to Mexico. Washington and New York will be part of ‘Atlantic America’ that may join the European Union. Canada will grab a group of Northern states and Hawaii will be a protectorate of Japan or China, and Alaska will be subsumed into Russia.”*

No, this is not some looney blogpost or a newsletter that no one reads; it is on the front page of the Wall Street Journal–widely considered one of the most prestigious financial newspapers around the world, with circulation of 2.8mn copies and 37 Pulitzer Prizes.

2008 appears to be a long time ago, but the feeling of pessimism surrounding the article seems as pervasive even today. A perusal of several social media or news articles indicates an impending doom of the second Covid wave in India. There is no denying that the on-ground situation in India is acute, but the news reports almost conclude that there is no end in sight. Consider this Bloomberg article ⁽²⁾ which lists everything problematic, without even mentioning how the situation is improving at the margin. Or this article ⁽³⁾ which lists how the absolute number of Covid cases in India is the highest now, disregarding the size of India’s population and density.

One often wonders, why the exaggerated pessimism? Morgan Housel deals with this subject beautifully in his book The Psychology of Money. He says that optimism is the best bet for most people because the world tends to get better most of the time, but pessimism holds a special place in our hearts. Pessimism sounds smarter, it is intellectually captivating, and it is paid more attention than optimism, which is often viewed as being oblivious to risk.

Historically, the odds that an outcome will be in our favour over time are greater despite there being setbacks along the way. Optimism is focusing on the higher odds; pessimism is focusing on those setbacks.

However, sounding pessimistic grabs attention faster. As Morgan puts is, “if a smart person tells me that a stock pick that’s going to rise 10-fold next year, I will immediately write him off as nonsense; but, if someone who is full of nonsense tells me that a stock that I own is about to collapse because of accounting fraud, I will clear my calendar and listen to his every word.”

Now imagine someone writing this in the late 1940s after Japan was gutted in World War II and the future appeared bleak. “Look today it looks bad, but it won’t be like this forever. Within our lifetime, our economy will grow 15x pre-war levels. Our life expectancy will double. Our stock markets will rock. Unemployment won’t cross 6% for decades. We will become world leaders in electronic innovation. We will become so rich that we will own a decent chunk of Manhattan, and yes, America will be among our closest allies.” Sound ludicrous, right? But that is exactly how it panned out*.

It is easier to create a pessimistic narrative when the panic is fresh in our memories. At the peak of the Covid crisis in India in March 2020, some prominent industrialists and politicians sounded intelligent by arguing how “India flattened the wrong curve” ⁽⁴⁾ by imposing the national lockdown and how “central leadership screwed up by not giving states the control to fight the pandemic ⁽⁵⁾.” In the second wave of covid, we find out how neither of those narratives was accurate.

In a 2008 letter to shareholders, this is what Warren Buffett wrote, ⁽⁶⁾ “amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21 1⁄2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges. Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.”

When we are on the river of life, it is more than likely that we will hit a few rocks. That’s not being pessimistic, that is being accurate. From memory, I recall Ayrton Senna, the Formula one car racing champion, saying something like this in an interview, ^{(7) “}I attempt that my car never goes into a tailspin. But when it does, I can either look at the wall I might crash against or the road where I am supposed to drag my car back to. Focusing on the road improves the chance of my car not crashing by a factor of 10. And in my line of work, that is difference between life and death.”

Pessimism helps sell book and newspaper, and it may even make you sound intelligent; but over the long term, does it really pay to be pessimistic all the time? During the previous crisis, Warren Buffett was focusing on the road instead of the wall; all of us might do a lot better with our investments if we did the same, the current covid predicament notwithstanding.

Notes:
(1) As if Things Weren’t Bad Enough, Russian Professor Predicts End of U.S. – WSJ
(2) India’s Covid Tragedy as Seen on Twitter, Instagram and Facebook – Bloomberg
(3) Covid: India sees world’s highest daily cases amid oxygen shortage – BBC News
(4) Coronavirus Lockdown Flattened The Wrong Curve: Industrialist Rajiv Bajaj To Rahul Gandhi On Lockdown (ndtv.com)
(5) Modi’s Need for Control Impairs India’s Coronavirus Recovery – Bloomberg
(6) printmgr file (berkshirehathaway.com)
(7) I fail to find a reference of this anywhere on internet. There is a strong possibility I maybe wrongly attributing this to Ayrton Senna
* Story adapted from the book: The Psychology of Money by Morgan Housel
This letter was originally published here: Pessimism sells, but does it also pay? – cnbctv18.com

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