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The Northwood Perspective

Pessimists Sound Smart. Optimists Make Money.

Scott Dickenson

There are a lot of great quotes related to investing and financial markets out there. Warren Buffett is so prolific at delivering these pearls of wisdom, that multiple people have written books which are simply compilations of Buffett quotes along with the author’s interpretation of each quote. I’ve included a selection of his greatest hits below to refresh your memory:

“The most important quality for an investor is temperament, not intellect.”

“Price is what you pay, value is what you get.”

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

There are some great lessons in the above quotes, but none of them rises to the top of my personal Mount Rushmore of investing quotes like the Nat Friedman quote that Patrick Collison tweeted out on May 21, 2020.

It’s so perfect that it’s almost too simple. In fact, it’s so simple that there is a reasonable chance someone else uttered those six words in that specific order at some point prior to May 2020. Whoever it was that first said it, there’s lots of wisdom in the quote to dig into.

There is no doubt that pessimism sells better than optimism. Fox News continues to be the most watched cable news network in the United States by feeding their audience a never-ending reminder of how badly things are going right now. Zero Hedge has millions of followers on Twitter for the same reason. As humans, we are still operating with a brain that evolved to scan the savannah for novel threats. This way of thinking was a great asset when it came to surviving in a world of pre-historic predators, but it can quickly become a liability when trying to filter out the noise of the modern-day financial media.

Pessimists also sound smarter than optimists. This is particularly true when it comes to financial commentators and writers. They were clever enough to identify a potential problem that everyone else is underestimating, and now they’re telling you why this problem is going to be much worse than the rest of the market is assuming it will be. Reading the most talented pessimistic financial writers can often feel like being let in on a secret that most people aren’t smart enough to realize. The allure of this kind of writing is hard to deny.

I actively try to avoid a bearish perspective in my writing (see the title of this article), but I’m occasionally guilty of presenting the pessimist case to sound smarter when meeting with clients. For example, which of the below two descriptions of what is going on in markets right now sounds smarter to you?

Optimist Case

“Well things have been trending in the right direction recently. Not a lot of people are aware of this, but the TSX is actually up 2.5% over the last year.1 The price of oil peaked in early June, and has moved down by over $40 per barrel since then. Inflation is still elevated but moving down, and the US and Canada keep releasing great monthly job numbers. Everyone still talks about a potential recession, but we’re definitely not in one right now.”

Pessimist Case

“It’s been a bit of a bounce back quarter, but it still feels more like a bear market rally than anything of substance at this point. There are still multiple red flags on the horizon including the ongoing war in Ukraine, rising core inflation, increasing chances of a central bank policy error tipping us into a recession and corporate earnings starting to miss expectations. We’re also starting to see major companies announce substantial layoffs. Did I mention that the head of the US Navy recently warned that China could invade Taiwan before 2024?”2

Most financial advisors, want to come off as intelligent when speaking to clients and cover every possible negative eventuality that might be raised in a future meeting. That’s why it’s easy to fall into the trap of talking about all the things that might go wrong, and not talking about the fact that historically things have generally gone right. So, while pessimists sound smart, optimists make money. I’ve probably shared the below chart before, but to me it’s one of the clearest distillations of why you should approach investing as an optimist.3

This is not meant to be an endorsement of blind optimism. Pessimists not only sound smart, but sometimes they’re right. Those warning about the perils of subprime real estate in 2007 may have sounded like pessimists at the time, but they were really canaries in the coal mine. The same goes for those who understood the magnitude of COVID-19 in early 2020 before the rest of the world caught on. The problem for pessimists is that these kinds of events don’t come along very often, and if you’re always warning about the next global cataclysm, you’re going to be wrong far more often than you’re right.

So go ahead and give optimism a try. Not only can it help you make money in the future, it’s also just a more pleasant mind state to inhabit on a day-to-day basis.

November 30, 2021 to November 30, 2022.

Scott Dickenson

Scott is a Principal in the Family Office Advisory group at Northwood. In this role, he acts as a trusted advisor to a number of Northwood’s client families in Ontario and British Columbia on their integrated financial affairs. In addition to his work with Northwood’s client families, Scott co-chairs Northwood’s Business Development and Marketing Committees alongside his colleague Brad Jesson. Scott writes frequently on the Northwood Perspective Blog, helped create the Northwood Quarterly Reading List, and has hosted several episodes of the Wealth of Wisdom podcast series. Beyond his duties at Northwood, Scott is a guest lecturer at the Rotman School of Management.

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