One of the reasons why Bill Gates made such a a success of Microsoft is that, early in his career, he found the right balance between optimism and pessimism. It's a hugely valuable life skill that you can apply to anything from business to investing and relationships. New Year is a time when people look ahead. Some do so with a sense of excitement, others with a feeling of dread. So which is the right approach — optimism or pessimism? Are we more likely to achieve our financial, professional and personal goals if we see a glass half empty or a glass half full? A new book by Morgan Housel addresses this important question. Housel’s first book, The Psychology of Money, is an international best-seller, with more than four million copies in print. His latest book, called Same as Ever, expands on some of the themes from the first, including how to visualise and handle risk. Both optimism and pessimism, says Housel, are vital for our survival, but both can be destructive when taken to extremes. The smartest people are those who can find the sweet spot between the two, and knowing how is one of life’s most important skills.
Bill Gates and the early days of Microsoft
An example of Housel gives of someone who possesses this skill is Bill Gates. On the one hand, Gates was an extreme risk taker. He saw an opportunity, quit university, risked his savings and went for it. But the way he managed Microsoft was anything but reckless. From day one he insisted on always having enough cash in the bank to keep the company going for 12 months with no revenue coming in. “What Bill Gates seems to get,” says Housel,” is that you can only be an optimist in the long run if you’re pessimistic enough to survive the short run.” The beauty of this skill Bill Gates exhibited — the author calls it rational optimism — is that it can be applied to almost any area of life. “The trick in any field,” he writes, “from finance to careers to relationships, is being able to survive the short-run problems so you can stick around long enough to enjoy long-term growth.”
Grounds for pessimism
Let’s look specifically at investing. Regardless of your time horizon, investing involves risk. It always has done and always will. In Same as Ever, Morgan Housel argues that, instead of trying to predict the future, and imagine how things might be different in future, we should think instead about how things will be the same. After all, human nature never changes, and we will continue to live with the consequences. Investors, in other words, need to learn from the lessons of the past, and some of the lessons the author refers to are pretty sobering. For example: History hangs by a thread: “Some of the biggest and most consequential changes in history happened because of a random, unforeseeable, thoughtless encounter or decision that led to magic or mayhem.” Global crises are inevitable: “It’s good to always assume the world will break about once per decade, because historically it has.” Spotting a crisis ex ante is extremely hard: “The biggest risk and the most important news story of the next ten years will be something nobody is talking about today.” There will always be booms and busts: “I’m confident in other people’s overconfidence, so I know there will be mistakes and accidents and booms and busts along the way.” Crashes will always catch people off guard: “The irony is that when markets are guaranteed not to crash — or when people think that’s the case — they are far more likely to crash.”
Reasons for optimism
If all that has left you feeling a bit down, the good news is that Housel’s book also gives us several reasons for optimism. For example: Uncertainty is perfectly normal: “Crazy doesn’t mean broken. Crazy is normal; beyond the point of crazy is normal.” Challenges present economic opportunities: “Hardship… is the most potent fuel of problem-solving, serving as both the root of what we enjoy today and the seed of opportunity for what we’ll enjoy tomorrow.” Healthy economies grow very fast: “Real GDP per capita increased eightfold in the last hundred years.” Emerging economies have vast potential: “America of the 1920s had the same real per-capita GDP as Turkmenistan does today.” Good things are happening all the time: “The irony is that growth and progress are way more powerful than setbacks. But setbacks will always get more attention because of how fast they occur.”
Seeing the whole picture
There are, then, causes for both pessimism and optimism at the same time. Rational optimism is about seeing the bigger picture and realising things are rarely as good or as bad as they seem. Of course, you could make a case for saying that the global outlook at the start 2024 is particularly gloomy. There are warnings of a possible recession and a sharp correction is US stock prices in particular. Inflation remains high and interest rates may have further to rise. There are few signs of an end to the conflicts in the Ukraine and Gaza. Could another crisis — a Chinese invasion of Taiwan, say, or victory for Donald Trump in November’s Presidential election — prove the straw that breaks the camel’s back? Perhaps it might. But there is plenty of good news out there — positive new stories around the world that perhaps aren’t given sufficient attention. Here are a few examples, courtesy of Future Crunch, a charity that finds and shares stories about progress for people and the planet:
- More electricity was produced from wind and solar than from fossil fuels in the EU in May, for the time on record
- The first transatlantic flight by a passenger jet fully powered by sustainable fuel took off from Heathrow in November
- CO2 emissions from China, the world’s biggest polluter, will start shrinking in 2024
- Efforts to improve air quality in Europe are paying off, with fewer illnesses and premature deaths due to people breathing polluted air
- The hole in the ozone layer is on track to be closed over most of the world by 2040, according to scientists
- Two new drugs in 2023 have been shown to slow the pace of Alzheimer’s disease substantially
- Aids deaths fell to 630,000 in 2023, a reduction of 69 per cent since their peak in 2004
- Child mortality rate have dropped sharply, with the number of children dying under the age of five has falling by 59 per cent within a single generation
- There are 50 million more girls in school around the world today than there were in 2015
- India made history in August by becoming the first country to land a spacecraft at the southern pole of the moon
- The number of nuclear weapons has declined by more than 80 per cent since the Cold War
Takeaways for investors
So what does all this mean in practical terms for investors? The answer, says Morgan Housel, is to be both a pessimist and an optimist: save like the former, invest like the latter, and focus on the long term. “In finance,” he writes, “spending less than you make, saving the difference, and being patient is perhaps 90 percent of what you need to know to do well.” Keep an open mind, and keep reading and learning from history. Be very wary of narratives, and disregard forecasts, because nobody knows what the future holds. Instead of trying to predict the next crisis, just make sure you’re prepared for it. Whatever you do, don’t capitulate in the face of inevitable short-term setbacks. You need to stick around long enough to benefit from the long-term growth. Of course, we can only dream of the riches Bill Gates has enjoyed, but taking the same approach to risk as he did will almost certainly pay off eventually. Same as Ever: Lessons on Risk, Opportunity, and Living a Good Life by Morgan Housel is published by Harriman House.
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