|One of the biggest obstacles investors face, I think, is the seduction of negativity. I think we are hardwired through evolution to be extra reactive to bad things because overreacting to that rustling bush would make you more likely to survive than under reacting to it if it happened to have a tiger behind it, even if that was unlikely, just the nature of evolution playing out over time. I was involved in a newspaper for a long time and the surly old editor had a saying which was, "If it bleeds, it leads." The negative thing has to go on the front page. That sells more papers.
|And of course our mutual friend, Tom Gayner, used to love to quote an expression of my grandfather's which was, "You always sound smarter if you're bearish." People want to hear how their advisor, how the expert is pointing out all of the things that could go wrong. And yet everything in the record speaks to progress. And that's not just the investment record, it's the human record. And yet nobody thinks the world's getting better. So I'm curious how you think to address that power of negativity that keeps investors paralyzed, prevents them from getting started because they can only see and they only hear about all the things that are wrong.
|There's a great quote from a historian named Dierdre McCloskey who says, "For reasons I've never understood, people love to hear that the world is going to hell." They love it. And I think that seduction of pessimism has been around forever and will always be around. I think in investing, a lot of it is that optimism sounds like a sales pitch and pessimism sounds like somebody's trying to help you.
|And then I think a lot of people for good reasons are skeptical of overt optimism in investing because it often is a sales pitch. Even if, as you spoke to, the record of progress is right there in front of us. The nuance, I would say, is that there is a long history of progress in markets and humanity for the survivors, for the people who can stick around and endure the ups, the volatility and endure the down times, that's when, who the progress is for.
|And therefore my definition of reasonable optimism of where do you want to be, is a reasonable optimist is not someone who says, "Everything is going to be great in the future." That's not optimism. That's complacency. If you think everything is going to be great, you're just being complacent. Reasonable optimism is this idea that all of what is in front of me is going to be a constant chain of loss and decline and negativity and surprise and recession and bear market and pandemic. But if I can endure all of those and stick around, the rewards for me overtime will be incredible. From a personal finance perspective, I think the idea is to save your money like a pessimist and invest your money like an optimist.
|And people want to have optimism or pessimism as black and white. You're either one or the other. And I think you need to get them to coexist with each other. That on one hand, I am a huge pessimist in how I save, just because I know that personally and throughout the economy, what's going to face me in the next 12 months, five years, 10 years are going to be some challenges and some curveballs and I need to have a level of pessimism to help me endure those. But if I can survive all of those financially, endure those, then if I can invest for the next 50 years, I have a hundred percent certainty, confidence, that people will become more productive, will have innovations that will accrue to the long term investors. So having those things together is really important.
|There's a story of Bill Gates that I really like who, back in the 1970s and 1980s, Bill Gates made the most audacious bet maybe of any businessman, which is that everyone in the world should have a computer on their desk. Incredible, audacious, crazy bet that he made, because he's an optimist about technology. On the other hand, Bill Gates said that from the day he started the company, he wanted enough cash in the bank so that he could make payroll for one year with no revenue, which is the most pessimistic conservative way to run a company that you can imagine. So he had, on one hand crazy audacious optimism and on the other hand, complete paranoid conservatism at the same time. And I think getting those two things to coexist is really the trick to dealing with the seduction of pessimism when optimism is the correct mindset. You need to have both of those at the same time. And that cognitive dissonance can throw a lot of people for a loop. They either want to be pessimists or optimists. Getting them at the same time is what's tricky.
|Well and also if we could solve pessimism, it would be a mistake. In other words, if you think ... I love Ben Franklin. In his list of virtues that he would work on through his whole life, and he carried the card that listed the 12 virtues that he would spend each 30 day period working on one of them. And then he would move to the next. And he said the one that gave him the most difficulty was humility because he said whenever he solved it, he felt so proud of himself he had to give himself a mark that he had failed in humility because he had become so boastful of his success in conquering humility.
|The pessimism that we feel as a species, that we're wired for, it doesn't just serve the individual to survive. I think it serves us as a species that we over worry about certain things. And that worry, our fear, improves the social condition. So it is anger, outrage, sadness, empathy, awareness of all of the suffering and hardship in the world that makes us make progress towards ameliorating those conditions and solving them. So that if we ended up simply accepting the brute fact that over time, the world has gotten better for human beings and in all likelihood it should continue to do so, if we embrace that as a species, of course the future would then become much less bright because we would become...
|We're all going to go lay on the beach rather than panicking about our terrible future so that we need to go out and make a lot of progress and innovations. All throughout history, the biggest innovations come when the world is on fire. It's the Great Depression was actually the most productive economic decade in terms of productivity that we've ever had, because you had all these businesses, virtually every business in the United States and around the world saying, "If I don't figure out a better way to run my business, I am gone tomorrow." So the number of innovations that came out of that, the supermarket, the dry cleaner, the laundromat, all of these things came about not in spite of but because of the great depression.
|And you look at what happened in World War II and the Cold War, the number of inventions that you and I are using today, if not right now at this moment that came about specifically because of World War II, going down the list from nuclear energy to radar, to rockets, to jets, to mass producing penicillin, there's all these things that came out because of the war. There have been some estimates that World War II, and this kind of an insensitive way to think about it but it's interesting, World War II may have saved more lives than it took. Specifically just if you just look at the one thing that came out of it, which was penicillin, just because of that, it may have saved more lives than it took. Just because the amount of innovation that takes place when people are panicked and pessimistic is so great relative to what it is when everyone has full bellies and everyone's happy and laying on the beach.
|Well and it ties into a ... when [inaudible 00:07:31] coined this term about black swans, and as investors, people need to think about black swans, the unknown unknowns, the terrible things that are unpredictable by their nature that will go wrong. I think one of the things that I've been struck by is the presumption and the assumption, explicit assumption, that black swans are negative. And of course the nature of these massive unpredictable events are in all likelihood evenly distributed, negative and positive. It's just, we will never read about what ...
|I'll project it forward and say, "Look, if I was to tell you in the next 30 years, we are going to be buried by healthcare inflation, it just seems inexorable. That is the way you should bet. It certainly looks like we are making healthcare promises that we cannot keep under the existing system." And yet the idea that there could be a cure for diabetes, Alzheimer's, and Parkinson's, let's just take those three. If we cured those three, we would have medical deflation and at a big scale. Well, I don't want to invest assuming that we're going to solve those three hugely expensive illnesses. But if you were to ask me in my heart of hearts if I think it is likely, I think the innovation like that is likely, it certainly is the record. And yet we assume that all of the unknowns in the future are negative because that's in a sense how we're wired.
|And so it is another thing as an investor, not to be a Pollyanna. I like what you said, invest as an optimist. I would say invest as a realist. And the reality would indicate that our inexorable move towards productivity, towards enriching, solving the world's most complex problems, solving the risk of nuclear war, solving starvation, solving infant mortality, solving women's literacy, and girls education. There has been an enormous amount of progress. And the fact of that progress, one of the troubling things about where we live today, is that stating that progress makes you sound insensitive to the hardship that's out there. And it's very important to say both those things at the same time. The world is a lot better than it was, and it still has a long way to go. And I think that mindset can carry people forward.
Chris & Morgan Bios
Chris is Chairman of Davis Advisors, an independent investment management firm founded in 1969 with approximately $20 billion in AUM. He’s co-portfolio manager of the Davis NY Venture Fund as well as other portfolios focused on Large Cap and Financial companies across mutual funds, SMAs and ETFs. Chris has over three decades of experience in investment management and securities research, was recognized as a Morningstar Manager of the Year and was recently named to the Board of Directors for Berkshire Hathaway.
Morgan is a partner at The Collaborative Fund and serves on the board of directors at Markel Corp. His book The Psychology of Money has sold over two million copies and has been translated into 49 languages. He’s won multiple awards and accolades for his writing and insights from the Society of American Business Editors and Writers, the New York Times, and other industry organizations. Morgan has presented at more than 100 conferences in a dozen countries.