Sunday Email: Optimism over Pessimism / Innovation is a Must

Read time: ~4.30 minutes

Happy Sunday!

Every Sunday I offer strategies for the week ahead and a thought to fuel your action.

The year was 2008.

Global economic turmoil loomed large, fueling widespread fear.

At this time, Lester Brown (an environmentalist) wrote that by 2030, China (alone) would need 98 million barrels of oil daily. Brown further pointed out that the world is currently producing 85 million barrels a day.

He made a dire forecast: the world’s oil reserves would soon be depleted.

His thesis was rational. It was built on what we knew and extrapolated out to what we didn’t know.

Yet, he didn’t account for human ingenuity or market forces.

A shortage of oil pushed up oil prices. These high prices incentivized producers to develop new drilling techniques, and now we have more oil than we know what to do with.

World oil production in 2022 was 94 million barrels per day. Near the “oil is gone” breakpoint. And yet we have no problem.

The Lester Brown prediction is an example of the “end of history illusion,” where we assume that no further developments can surpass what has already occurred.

It reflects a broader human tendency to view the present as a permanent state, leading us to make conservative, often pessimistic forecasts. We tend to extrapolate the world we know into the future on the same trajectory. We see the economic pie as being set. Yet, technology and economic advancements allow the pie to expand.

However, people leaned into the Lester Brown theory because it was based on sound data. It created tangible action items (find alternative energy sources). And for anyone that was to come out and say, “Things will be fine, the markets will correct this.” This person would be looked at as blind to reality, foolish, and an oblivious sucker.

And this shows why pessimism sounds smart. Yet, it’s dangerous.

As advisors to clients who are entrusted with helping them reach a financially secure retirement, we must be cognizant of pessimistic tendencies. Pessimism drives reactive actions and conservative stances. And in a world where prices of goods have consistently increased, we must help our clients stay ahead, not get behind.

Why do pessimists sound so smart? Morgan Housel has written a great deal on this. And here are some reasons:

• Optimists seem oblivious to risks, making pessimists seem more intelligent

  • The reality is not that optimists are oblivious to the risks; they just see the risks as part of the journey, not the end of the journey (the time frame is key, and more on this later).

• Pessimism helps rationalize why things aren’t good for people

  • Human nature makes it hard for us to put the blame on ourselves. We like to point to “other” aspects as being the drivers for why we aren’t doing well or reaching our goals. Pessimistic views allow us to point to something else and rationalize.

• Optimism sounds like a sales pitch, pessimism sounds like someone trying to help you

  • A pitch saying, “Trust me, everything will be fine, and we will make it through this” seems salesy. Yet, someone saying… “The economy is struggling with high inflation, which will persist and elevate the cost of living; thus, we need to protect our wealth,” seems like a strategy to help and is based on facts.

The true difference between optimism and pessimism, though, boils down to endurance and time frame.

The pessimistic view frames everything as short-term. For instance… rates are higher today, so that’s it; they are higher forever, which is bad. Or the market has fallen 20%, and equity investments are no longer a good option.

Whereas the optimists view these as… rates are higher today, markets will normalize them over time, and we will see normal rates over time. Or, the market has fallen 20%, but things will turn, and markets won’t fall forever.

The optimist sees the world as a forever journey. The pessimists see each bad thing being the end of the book.

Optimists aren’t blindly hopeful. They don't ignore risks but interpret them as challenges to overcome, not insurmountable barriers. This perspective is crucial because it extends our strategic horizons and enhances our resilience.

Success is never a straight line. Sports teams rarely go undefeated on the path to winning a championship, and self-improvement or mastering a new skill is never a straight line. To win a championship and to gain a new skill, we must break things down and expose our weaknesses. This allows us to improve where we are weak and grow, allowing us to reach a new plateau.

Pain, regret, and challenges fuel long-term benefits and improvement.

The rules of progress apply to the economy as well. To get better, we must face challenges. We must see both economic booms and busts. The busts give us perspective on where we can improve. Without them, we are blind to weaknesses.

With the busts, we evolve and grow stronger for the next run. Ultimately we reach a new plateau and run through this cycle again.

A challenge we face is that short-term shocks and pains (negative headlines, etc.) are going to happen more frequently. They will be easier to remember than any of the long-term gains. Long-term gains take a long time, making them less frequent and, thus, harder to recall. We remember that the markets fell nearly 20% in 2022. Yet, we don't remember that the markets have been up over 400% since 2009.

The end-of-history illusion tends to be an Achilles heel to us as we make decisions in the future. The illusion states that we underestimate the extent to which our personalities, values, and preferences will change in the future. We see that we have grown drastically, but we believe that is the extent of it.

This fixes our assumptions to today as we look to project into the future. And we know that tends not to be the case.

Real-life examples of this are being highly energized at the moment and setting goals that project that energy to continue forever into the future. Or vice versa, feeling depleted at the moment leads to neglecting certain paths under the assumption that this feeling will continue into the future.

As advisors, we have the responsibility to be aware of the trap of pessimism and incorporate, in our own ways, options to help our clients overcome the trap.

Some ideas for helping here:

• Reflect on the past: Regularly review past market corrections and recoveries to challenge the narrative that downturns lead to permanent loss. A tactic could be to start tracking today's negative sentiments and spend some time in the future tracking whether they were successful or not. This could be a good tool to use in client meetings to reflect on the past.

• Paint a picture for your future self: Develop and communicate clear, realistic visions of future financial goals. This provides a roadmap and helps clients and advisors stay focused amidst market noise.

• Share your personal vision: If we share our vision with others, there is a sense of accountability. Thus, we are more honest about where we want to go and less driven by the noise of today.

• Set realistic expectations/goals: Don’t set the goal that you want to have $5 million in assets by the age of 60 when you are only 40 years old. Set that you want to save $20K this year or reach $750K this year. Set the goal smaller and more current. This level sets expectations and keeps motivation, which is a positive feeling and leads to being more optimistic.

Ultimately, to become more optimistic, we must believe in the unknown and unspecified breakthroughs that will come. This seems fanciful and naive, but it has proven to be correct time and again.

The best way to stay optimistic is to stay present.

We must avoid the end-of-history illusion and realize that we will continue to evolve and adapt. Our progress over the last couple of centuries isn’t the extent of our progress.

Optimism creates opportunity, ensures a long-term perspective, and is not blind to challenges. It is the balance between realistic and hopeful, aware yet optimistic, and cautious but courageous.

Optimism is our responsibility.

A Thought To Ponder This Week

Steve Jobs is an innovator.

Henry Ford is an innovator.

Ray Kroc is an innovator.

Innovation is easy to think of as something others do. It is for the creatives; I’m not creative.

Yet innovation is becoming a part of who we are. Whether we are creative or tech-savvy or not, we must innovate.

The future of business will be firms that can disrupt themselves while still being able to serve their core business.

Innovation is a skill that can be learned. It’s a skill that has become necessary.

Innovation is less about brainstorming and more about resource allocation, refocusing our people, our assets, and management's attention.

At its core, innovation is not solely about developing new technology. It’s about scaling new services, processes, and business models for clients.

So, as we head into a new week, how might we rethink our current resource allocation to position ourselves to spur innovation rather than technology development?

The best is ahead!

-Matt