Transforming personal finance since 2011

#93 — Video: Pessimists Sound Smart, Optimists Make Money

November 26th, 2023

By Andrew Craig

Reading time: ~ 10 minutes

Watch now on YouTube

Video Transcript

Hello and welcome back to the Plain English Finance YouTube channel.
This is our second video in the new series we have started posting from November 2023 onwards.

The heading of this video and today’s topic as you will have seen is: “Pessimists sound smart, optimists make money…”.

This is one of my all-time favourite quotes - if only because believing it to be true really can have a significant, tangible and positive impact on your life.)

Over the past few years I have more or less frequently described “human progress” as the most important investment theme of all.

As I said in our last video - In the century from January 1923 to the end of 2022, the S&P index of American shares returned 10.34% per annum (that’s 7.25% adjusted for inflation).

Similarly, in the UK market, over the 66 years from 1955 to the end of 2021, the Numis NSC 1,000 Index of the smallest companies in the UK stock market returned an average of no less than 16.3% per annum (that’s 11.3% after inflation - and about four times the real return of UK house prices over the same time-frame).

Those sorts of investment returns are enough to make millionaires of “normal people” over many years of investment by the way – even someone on or around an average income.

If you stop for a moment to examine why those returns have happened, it is more or less obvious: You need only consider the extraordinary progress we have made as a species in those time frames.

In the last century we’ve enjoyed wave after wave of astonishing forward progress technologically.

Whether that has been the development and spread of the automotive industry, aviation and shipping, the advent of the silicon chip, the internet and smart phones or, more recently, the explosion in the biotech industry, artificial intelligence and machine learning, the list of such developments in the last hundred years is very long indeed.

The development, adoption and, crucially, convergence of all of the above technologies has driven the inexorable rise and rise of pretty much every sector of the economy decade after decade.

Sadly, however, vanishingly few people understand this reality and even fewer are taking advantage of it as investors due to a toxic combination of ignorance, inertia and fear. Or, put another way, because “pessimists sound smart.”

Not only do they sound smart, they also get a great deal more air time and press coverage than optimists for two related and more or less intractable reasons: First, a very strong and inherent bias to the negative in our press and, secondly, a raft of cognitive biases we have as human beings which are the underlying driver of that negative press bias to begin with.

Estimates vary, but it is a well-established empirical fact that wherever you live in the world, if you consume traditional media, whether television, newspaper, radio or online, the vast majority of “the news” that you are presented with every day has a very significant negative bias. We are all painfully aware that social media tends to be no different.

This is true of news coverage generally. If you are lucky, there might be a light-hearted story about a water-skiing squirrel or similar right at the end of a given television news bulletin, but next time you watch or consume “the news”, please do take a moment to really observe and take account of the percentage of the stories which concern something exceptionally awful, as against the percentage which might be considered to be focused on anything even vaguely positive: War, famine, murder, rape, disease, political corruption? Tick. Every night. An uplifting piece about a transformational new technology? Not very often.

The reason that our news is the way it is has to do with how human psychology functions at a very fundamental level, how this impacts all of us as the audience for “news” and how journalists, editors and media companies conduct themselves as a result.

The problem is that we human beings have some extraordinarily problematic “software” in our brains. We are hard-wired psychologically to focus on the extraordinary (and negative) to the exclusion of the unremarkable (and positive). Journalists and news editors know this, which is why they are particularly prone to the same phenomenon. This is what sells copy and drives clicks after all - precisely because we are all hard-wired this way. As the well-known news room saying has it: “If it bleeds, it leads.”

(We will discuss this topic in more detail in our next video by the way).

Why is this so important?
Because it impacts your ability to become wealthy!

This is because this strong inherent negative bias extends to the coverage of financial markets. A financial market crash of any kind will be emblazoned on the front of the majority of our newspapers and will headline TV news bulletins. The slow and steady appreciation of a given stock market over many decades that results from human progress, however, will never be front page news.

This also means that talking heads who are keen to tell us how awful things are and rant on about the possibility of a massive crash coming any day, tend to get a great deal more attention than the small minority of industry commentators who have something rather more positive to say who seldom get invited on to TV studio sets.

As a result, the majority of the population tends to have a horribly distorted view of and understanding of financial markets because the only time they ever hear about financial markets on the news, or - by extension - at all, is when there has been a “massive crash”.

…and this is one of the key reasons why the majority of people don’t invest. They think financial markets are fundamentally riskier and scarier than they actually are. They think the stock market is a casino and equate investment with gambling – which is a huge failure of our education systems and incredibly damaging to millions of people’s chances of becoming wealthy.

I believe this is one of the biggest tragedies of our time, without exaggeration. It is also the underlying driver of so many of our biggest problems as a society in the UK and beyond.

A depressingly small number of people know anything at all about financial markets or make use of them in an effective way, even in modern liberal democracies, even with the phenomenal access to
information that most people have these days, and even given the fact that the fundamental “technology” of financial markets has now been with us for more than two centuries.

In the UK, for example, as I said in our last video, fewer than 5% of the adult population have a stocks and shares Individual Savings Account (ISA) – one of the main tax-free investment accounts that a private individual in the UK might use to secure exposure to the stock market.

That is to say that something like 95% of the adult population are not knowingly or pro-actively investing in shares.

Millions of British nationals will have some exposure to the stock market via their pension funds, but a series of poor policy choices by successive British governments (both Labour and Conservative) over the last three decades or so have driven the level of that exposure to the lowest it has been in a generation, dooming many British pension holders to structurally low investment returns and an impoverished retirement and, crucially, wreaking havoc with the British economy.

As an article in the Financial Times put it in March of this year:

“Over the past two decades, holdings of UK-listed companies by British pension and insurance funds have plunged from about half of their portfolios to 4 per cent…”

(Source: “Corporate rush to offload pensions adds to pressure on UK equities.” - Financial Times, 10th March 2023).

Only 19 per cent of British pension fund assets are invested in shares overall (i.e. – when you include overseas shares from the US, Europe, Asia and other markets, over and above British shares alone). That number is down from more than 60 per cent from as recently as fifteen years ago.

(Source: “Diagnosing London’s listing miasma…”. - Financial Times, 10th March 2023).

This matters because it is hugely prejudicial to the trajectory of the UK stock market and, by extension, the UK economy and indeed society as a whole. It is a big part of why we find ourselves in so much trouble today.

A lot has been written in recent years about the extent to which leading British companies are avoiding the UK stock market and choosing other overseas stock markets. When it comes to very large companies, recent high profile examples include the UK’s leading semiconductor chip designer Arm Holdings, FTSE100 building materials group CRH and formerly one of the very largest companies in the FTSE, Anglo-Australian mining group, BHP Group, which took its main stock market listing to Australia in 2022.

Similarly, of 14 British biotech companies to float on a stock market since 2018, no fewer than 12 of them did that overseas, not in London, with 11 choosing Nasdaq in the US. The British IPO market has more or less ground to a halt in the last few years. This really matters – for all of us.

Because all of this has taken jobs, economic activity, tax revenues and innovation away from the UK.

Arguably of most importance, however, is the fact that the London stock market overall has lost a good deal more than 1,300 companies in the last 15 years. The total number of London-listed companies has fallen from 3,250 in Q1 2007 to around 1,900 today!

These things have all happened because of the gradual erosion of the UK's equity culture. Things have been particularly bad for smaller companies. This is extremely important and a big part of why Britain is struggling because of just how important small companies are in any economy.

In 2021, smaller companies accounted for more than 60% of employment and more than 52% of turnover in the UK private sector for example.

Even more important, numerous academic studies conducted over several decades have shown that smaller companies are extremely important for driving innovation and technological progress overall. They are also where larger companies come from – or should be at least, in a functioning economy and with a functioning stock market.

Google, Tesla, Facebook, Microsoft and even $3 trillion Apple were all smaller companies once upon a time. Their development into the global giants of today, valued in the trillions, relied on a fully-functioning US stock market.

In the next few weeks and months I intend to write a series of emails about why the UK stock market has become so particularly challenged in recent years, what this means for all of us and what we might do about it – and we will be sharing those emails here as videos on YouTube as well.

If you want to make sure you are one of the first to see these videos please do click the subscribe and “bell” buttons!!

(By the way – if you’re based overseas, I might note that many of these themes apply outside of the UK for what it is worth).

I will look at the role played by government policy and financial regulation, at the damage caused by the inexorable rise of passive investing as against active, and at the impact billions of pounds worth of crypto "investment" has had on real companies in the real economy.

Perhaps most importantly, we’ll look at what you might do about it all, and at the many reasons why it will still very likely pay you to be an optimist!

Until next time, I wish you the very best.

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