This Mindset Can Make You Rich
With the market in the midst of a correction, it's not a bad time to recognize that the economy and the world - by virtually every important measure - are on an overwhelmingly positive path.
In a column two weeks ago, I referred to a New York Times interview with Harvard psychologist Steven Pinker and Microsoft founder Bill Gates. The two men emphasized how modern life is getting steadily better, thanks to groundbreaking medicines, more labor-saving devices, new technologies and so on.
Too few investors fully appreciate this.
We in the West today are living longer, healthier, safer, richer, freer lives than any people in the history of the world. Bill Gates calls it "the greatest story that no one knows."
Just a few examples... War between states is down. Violent crime is down. Domestic violence is down. Child abuse is down. Abortion rates are down. Carbon emissions are down.
Poverty rates are also down. (And not just in the West. A new study by the Institute for Health Metrics and Evaluation at the University of Washington just reported that eight of the 20 nations in the world with the fastest-rising rates of adult obesity are in Africa.)
Meanwhile, leisure time, educational attainment, human life spans and average household net worth are all up.
If you understand this, it makes sense to be an equity investor. After all, modernization and innovation provide opportunities - as do problems that need to be solved.
Why do so many investors cling to their pessimism - and settle for low returns?
One reason, of course, is that our society faces serious problems. The world isn't perfect - and never will be. There is always room for improvement.
But that doesn't mean we can't appreciate what's right with the world - or how good things are for most of us.
Instead of seeing the big picture, many of us marinate in a sea of negativity.
A new 255-page report from the RAND Corporation, "Truth Decay: An Initial Exploration of the Diminishing Role of Facts and Analysis in American Public Life," reveals that Americans are overwhelmed by the fire hose of information hitting them daily from the internet, social media, newspapers, magazines, cable television and talk radio.
So just as music lovers find the channel that plays their favorite songs, we tune in to just the kind of news and commentary we want to hear.
Conservatives, for example, tend to listen to Rush Limbaugh, read The Wall Street Journal and watch Fox News. Progressives, on the other hand, are more likely to listen to National Public Radio, read The Washington Post or The New York Times, and watch MSNBC.
The internet allows us to fine-tune our "likes" even more. You can always find an online community that shares your point of view, no matter how sophisticated... or kooky.
As a result, people sort themselves into "information silos." And because journalism now blends with editorial, we end up hearing the same talking points over and over again.
This isn't necessarily a good thing.
Today's technologies have eliminated barriers into public conversation. Now everyone can be heard.
Unfortunately, not everyone is educated enough, knowledgeable enough or experienced enough to offer something worth hearing.
Since social media doesn't require credentials, those who end up attracting the biggest audiences are not necessarily the smartest or most perceptive, but rather the shrillest or most indignant.
What does all this have to do with your investment portfolio?
Just this: If you're stuck in an information silo of negativity - reinforced by an echo chamber of pessimistic thinkers - you aren't getting a nuanced or valid perspective.
After all, the mainstream media hypes threats and bad news to attract viewers. (Bigger audiences mean more and higher-paying advertisers.) Bloggers and other social media leaders do the same.
What is the incentive - where is the money - in telling listeners that life today is immeasurably better and easier than it was for your ancestors, most of whom struggled merely to survive?
This is why it pays - literally - to listen to credible voices of optimism.
Take the world's greatest investor, Warren Buffett.
Writing in the January 15 issue of Time, he said...
In 1776, America set off to unleash human potential by combining market economics, the rule of law and equality of opportunity. This foundation was an act of genius that in only 241 years converted our original villages and prairies into $96 trillion of wealth... In the years of growth that certainly lie ahead, I have no doubt that America can both deliver riches to many and a decent life to all.
Optimism doesn't mean you turn a blind eye to negative circumstances. But there is a huge payoff in seeing gray skies as just passing clouds.
If you aren't optimistic, why would you start a new business, expand an existing one or risk your hard-earned capital in the stock market?
You wouldn't. And, in fact, many haven't.
According to EPFR Global, investors yanked tens of billions of dollars more out of equity mutual funds last year than they put in.
It was poor timing. The U.S. economy just posted its best nine-month stretch of growth in years - and in the face of two devastating hurricanes.
Fund industry figures show that investors withdrew billions more from equity funds over the last week.
Yet with interest rates low, energy cheap, corporate earnings up, consumer and business confidence rising, wages higher, and regulations and other federal red tape coming down - along with individual and corporate tax rates - there are good reasons for long-term optimism.
Smart investors recognize this - and will invest accordingly.
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