Why the Mainstream Media Promotes Pessimism

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
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Surveys regularly show that the majority of Americans believe the nation's best days are behind us, that our children face a diminished future and that the country is decidedly on the wrong track.

If you truly feel this way, however, it's tough to invest in equities and reap the higher returns that they offer. After all, stocks represent a claim on the dividend distributions and future appreciation of publicly traded companies.

If the present is bad - and the future even worse - why take the risk?

Because things aren't that bad. We live in a golden age... yet most people don't realize it.

Getting Better

A couple of years ago, I traveled to the Cato Institute in Washington, D.C., to participate in a forum called "If Everything Is Getting Better, Why Do We Remain So Pessimistic?"

The theme was a bit of an exaggeration, of course. Everything is not getting better. The unchecked growth of government is but one example.

However, the folks at the Cato Institute - an organization that conservative columnist George Will calls "the foremost defender of liberty in the country that is the foremost defender of liberty" - know this well. They merely wanted to underscore that the vast majority of human beings alive today have it better than any previous generation.

This comes as news to some people, often because they spend so much time watching the news, where crime, war, corruption, pollution, terrorism and political dysfunction are recycled 24 hours a day.

Here's what they often miss...

The human life span has never been longer. Formal discrimination against women and minorities is continues to decline. Standards of living have never been higher. Crime is in a long-term cycle of decline.

In the West today, we have tremendous political, economic and religious freedoms. We work shorter hours, have more purchasing power, enjoy goods and services in almost limitless supply, and have more leisure time than ever before. Travel - to the next town or the other side of the world - has never been easier or more affordable. Access to the arts has never been greater.

Senior citizens are cared for financially and medically, ending the fear of impoverished old age. Literacy and education levels are at all-time highs. Technology and medicine are revolutionizing (and extending) our lives. With the exception of greenhouse gases, all forms of pollution are in decline. Despite the headlines, the risk of death by violence has never been smaller. And the Federal Reserve reports that American household net worth is at an all-time record high of $96.2 trillion.

In short, most of us live longer, healthier, safer, richer and more comfortable lives than our ancestors could ever have imagined.

Why the big disconnect between the way things are and how we perceive them?

Conspiracy of Misinformation

One reason is simply the nature of the media. No one wants to hear about the planes that didn't crash, the buildings that didn't burn or the surfers who weren't bitten by sharks.

Bad news makes good headlines. But it also presents a distorted picture of the world. Positive long-term trends aren't news. Today's disasters are.

As former Cato vice president of research Brink Lindsey put it, "The media just doesn't do long-term, incremental progress well."

Harvard psychologist Steven Pinker argued that we are hard-wired to feel pessimistic. It's in our genes.

Our ancestors on the plains of Africa who were nervous and fearful survived and reproduced. The men and women who thought a rustle in the grass was just the wind - not a predator - left fewer descendants. Our brains evolved to do a good job of imagining just how scary things can be.

Pinker noted too that as we get older, we tend to confuse changes in ourselves with changes in the world. From middle age on, we tend to start feeling that young people are less respectful, music is worse, the world is going to hell in a hand basket... and most people "just don't get it."

And let's be honest... the music was a lot better.

But then so were we in many ways. When we were young, we were stronger, leaner and healthier. Our vision and hearing were better. We had no wrinkles and more hair... or at least it wasn't gray. We were optimistic, even idealistic.

But we change as the decades roll by... and we can confuse our personal diminution with a declining state of the world.

The Benefits of Pessimism

Also, and perhaps subconsciously, many of us want to appear pessimistic. Pessimists seem better informed, morally engaged, nobody's fool. It shows you aren't a patsy or a Pollyanna. Why else would so many remain pessimistic even as their worst fears remain unrealized?

In the past, of course, pessimists were eventually proven right. The rise of the Roman Empire was followed by the decline and fall of the Roman Empire. Some people argue that the United States is on the same path today.

Yet pessimism is seldom conducive to stock market success. Legendary investors like John Templeton, Peter Lynch and Warren Buffett had an optimistic outlook on the world that simply didn't have an off switch.

Fearful investors often miss historic market rallies (like this one). They wait for disaster to strike while those of a more optimistic bent enjoy outsized returns.

That could change, of course. And without warning.

In my view, an optimistic investor is not one who blithely puts his faith in higher share prices. History shows that every bull market is eventually followed by a bear market. (And vice versa.) High long-term returns generally come with neck-snapping volatility.

So the smart investor hedges his bets. He invests outside of equities. He diversifies his holdings. And he runs trailing stops behind his individual stocks.

The savvy investor doesn't just hope for the best. He plans for the worst.

The pessimist does only the latter.

Good investing,

Alex

Thoughts on this article? Leave a comment below.

How Gradual Change Leads to Immense Profits

Alexander Green’s Oxford Communiqué subscribers already know how much the human condition is improving over time.

In fact, they’ve profited immensely from rising standards of living in the developing world through the Templeton Emerging Markets Fund (NYSE: EMF).

Here’s Alex checking on the pick a few years back...

Over the years, I’ve spilled a lot of ink describing how investors are misled by the national media.

I’m not talking about bias or misinformation. I’m talking about the very nature of the media itself. Good news is viewed as dull, boring or pedestrian. Bad news is ratings gold.

But aside from presenting an unnecessarily dark view of the world, the media invariably misses the really big things that happen gradually.

For instance, the biggest economic news of the past 30 years wasn’t the Asian financial crisis of 1997, the meltdown of the financial sector in 2008 to 2009 or even the stresses and strains that now threaten the Eurozone. What impacted the global economy the most (and will again in the next 30 years) was the near-miraculous but entirely gradual rise in the prosperity of the citizens of Latin America, Eastern Europe and Asia.

In 1980, for example, these developing countries accounted for just 30% of global economic growth. Today they generate more than half.

Emerging nations cover 77% of the world’s land area and represent 85% of the world’s population. There are now 3.8 billion “middle-class” people in the world today. And thanks to emerging market growth, that number is likely to double over the next 20 years.

The investment implications here are stupendous. Yet I speak to many Americans who say their emerging market exposure is somewhere between meager and nonexistent.

An easy remedy is the Templeton Emerging Markets Fund (NYSE: EMF), a longtime member of our Oxford All-Star Portfolio that already returned more than 280%.

Some folks on Wall Street imagine you can run a successful emerging markets fund out of an office in New York City. Templeton Emerging Markets Fund Manager, Dr. Mark Mobius, disagrees. He makes a habit of getting on his private jet and visiting the management and operations of each company before it goes into the fund’s portfolio.

Often in the past, a foreign market reported a 3% to 4% jump on the news that Mobius’ Gulfstream IV just landed at the local airport. He toured rubber plantations in Thailand, rode bikes over pothole-ridden roads in China, hobnobbed with princes and sheiks in Arabia and was swindled by gangsters in Russia.

Mobius knows that developing countries are making the right moves. Most evolved from autocracies to democracies and from state-controlled economies to capitalist ones. They’re also moving from nationalized to privatized industries and from high taxes and tariffs to lower ones.

Still, superior returns in these markets come from expert stock selection. This is where Mobius excels. And this is why EMF is part of our All-Star Portfolio.

- Samuel Taube with Alexander Green

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