If we divide equity investors into two groups – pessimists and optimists – you have two very different outcomes when you evaluate their investment performance over a longer time period. Pessimists will always find a reason not to buy equities, while the opposite is true for optimists. What makes investing in equities over the shorter term difficult, is the fact that both parties can produce vast amounts of slides to support their view at exactly the same time, rendering the use of fact-based information to make a decision obsolete. If, however, we evaluate the longer-term performance of equities, we see that most equity markets are currently trading at all-time highs. This would imply that no optimistic longer- term investors, irrespective of the timing of their investment, have lost money. Also, given the fact that equities are the best-performing old-school asset class, all of them have done better than the pessimist who stayed in cash or bonds.
It must be said that after three years of good equity returns, we are facing a year of potential consolidation; and expectations over the shorter term should be managed. It is healthy to be pessimistic when investing for periods of shorter than five years, but for longer-term growth one has to be an optimist.
One of the mistakes pessimists make, is to believe that whatever could go wrong in the economy, will reflect directly in the values of the companies you can invest in. Pessimists will never entertain the possibility that there might be well-run companies, operating in a free-market environment, that could find opportunities in a troubled economy that would enhance their value rather than detract from it. Another flaw in the investment philosophy of pessimists is that they do not take into account that markets can remain irrational for such a long period of time that when the dark rumours of doom do materialize in the prices of shares, they have gone up so much that a material fall will still not be enough to take them below the value of the pessimist’s position in cash or bonds. If you invest R100 in share XYZ and it goes up 50%, you will have a share worth R150 at the end of the year. If it then gets smashed by 25%, your share will be worth R112.50, which is double what cash would have given you. But, the biggest flaw in the investment mindset of the pessimist, is the fact that even when the markets crash, they will still wait for it to crash further, ending up never investing in shares, and missing the opportunity they believed would come.
Life as a whole is much better when you do not become fixated on the negatives but rather focus on the positives, and investing is definitely in that camp. There will always be a mixed bag of good and bad things to work through. The potential dangers of today are not worse than the dangers that existed ten, twenty or even fifty years ago. The environment we are currently living in is evolving at a very rapid pace, resulting in new challenges coming to the fore, but it is not unusual. There are very gifted people who run very large and powerful companies and who can see the potential of certain outcomes far better than the analyst or fund manager sitting in an office, going through quarterly financial statements, and getting spooked by everything that could go wrong over the shorter term.