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3. 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
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