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A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future
—is vital.
Optimism is usually defined as a belief that things will go well. But that’s incomplete. Sensible optimism is a belief that the odds are in your favor, and over time things will balance out to a good outcome even if what happens in between is filled with misery. And in fact you know it will be filled with misery. You can be optimistic that the long-term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with landmines, and always will be. Those two things are not mutually exclusive.
The idea that something can gain over the long run while being a basketcase in the short run is not intuitive, but it’s how a lot of things work in life. By age 20 the average person can lose roughly half the synaptic connections they had in their brain at age two, as inefficient and redundant neural pathways are cleared out. But the average 20-year-old is much smarter than the average two-year-old. Destruction in the face of progress is not only possible, but an efficient way to get rid of excess.
Imagine if you were a parent and could see inside your child’s brain. Every morning you notice fewer synaptic connections in your kid’s head. You would panic! You would say, “This can’t be right, there’s
loss and destruction here. We need an intervention. We need to see a doctor!” But you don’t. What you are witnessing is the normal path of progress.
Economies, markets, and careers often follow a similar path— growth amid loss.
Here’s how the U.S. economy performed over the last 170 years:
But do you know what happened during this period? Where do we begin …
1.3 million Americans died while fighting nine major wars.
Roughly 99.9% of all companies that were created went out of business.
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 number of forecasters who predicted any of those recessions rounds to zero.
The stock market fell more than 10% from a recent high at least 102 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.
Our standard of living increased 20-fold in these 170 years, but barely a day went by that lacked tangible reasons for pessimism.
A mindset that can be paranoid and optimistic at the same time is hard to maintain, because seeing things as black or white takes less effort than accepting nuance. But you need short-term paranoia to keep you alive long enough to exploit long-term optimism.
Jesse Livermore figured this out the hard way.
He associated good times with the end of bad times. Getting wealthy made him feel like staying wealthy was inevitable, and that he was invincible. After losing nearly everything he reflected:
I sometimes think that no price is too high for a speculator to pay to learn that which will keep him from getting the swelled head. A great many smashes by brilliant men can be traced directly to the swelled head.
“It’s an expensive disease,” he said, “everywhere to everybody.”
Next, we’ll look at another way growth in the face of adversity can be so hard to wrap your head around.
“I’ve been banging away at this thing for 30 years. I think the simple math is, some projects work and some don’t. There’s no reason to belabor either one. Just get on to the next.”
—Brad Pitt accepting a Screen Actors Guild Award
Heinz Berggruen fled Nazi Germany in 1936. He settled in America, where he studied literature at U.C. Berkeley.
By most accounts he did not show particular promise in his youth. But by the 1990s Berggruen was, by any measure, one of the most successful art dealers of all time.
In 2000 Berggruen sold part of his massive collection of Picassos, Braques, Klees, and Matisses to the German government for more than 100 million euros. It was such a bargain that the Germans effectively considered it a donation. The private market value of the collection was well over a $1 billion.
That one person can collect huge quantities of masterpieces is astounding. Art is as subjective as it gets. How could anyone have foreseen, early in life, what were to become the most sought-after works of the century?
You could say “skill.”
You could say “luck.”
The investment firm Horizon Research has a third explanation. And it’s very relevant to investors.
“The great investors bought vast quantities of art,” the firm writes.¹⁹ “A subset of the collections turned out to be great investments, and they were held for a sufficiently long period of time to allow the portfolio return to converge upon the return of the best elements in the portfolio. That’s all that happens.”
The great art dealers operated like index funds. They bought everything they could. And they bought it in portfolios, not individual pieces they happened to like. Then they sat and waited for a few winners to emerge.
That’s all that happens.
Perhaps 99% of the works someone like Berggruen acquired in his life turned out to be of little value. But that doesn’t particularly matter if the other 1% turn out to be the work of someone like
Picasso. Berggruen could be wrong most of the time and still end up stupendously right.
A lot of things in business and investing work this way. Long tails— the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes.
That can be hard to deal with, even if you understand the math. It is not intuitive that an investor can be wrong half the time and still make a fortune. It means we underestimate how normal it is for a lot of things to fail. Which causes us to overreact when they do.
Steamboat Willie put Walt Disney on the map as an animator. Business success was another story. Disney’s first studio went bankrupt. His films were monstrously expensive to produce, and financed at outrageous terms. By the mid-1930s Disney had produced more than 400 cartoons. Most of them were short, most of them were beloved by viewers, and most of them lost a fortune.
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